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In his Geschichie und Kritik der Kapitalzins-Theorieen (1884), which 
I translated in 1890 under the title of Capital and Interest, Professor 
Bohm-Bawerk, after passing in critical review the various opinions, 
practical and theoretical, held from the earliest times on the sub- 
ject of interest, ended with the words : " On the foundation thus 
laid, I shall try to find for the vexed problem a solution which 
invents nothing and assumes nothing, but simply and truly attempts 
to deduce the phenomena of the formation of interest from the 
simplest natural and psychological principles of our science." The 
Positive Theory of Capital, published in Innsbruck in 1888, and here 
rendered into English, is the fulfilment of that promise. 

The criticisms directed against the various theories of Interest 
in the former work may be briefly summarised as follows. 

The Productivity theories — those which, more or less explicitly, _J 
attribute the existence of interest to the productive power of capital 
— are dismissed as confusing quantity of product with value of pro- 
duct, either in the way of tacitly assuming the identity of the two, 
or of failing to show any necessary connection between them. The 
problem of capital is a problem of surplus value, and value does not 
come from the side of production but from the side of consumption. 
Capital is productive, but interest is not its product. 

The Use theories, which are a more or less scientific expan- J 
sion of the familiar formula, " Interest is the price paid for the use 
of capital," are shown to base interest, which is notoriously an 
Income obtained from all kinds of capital, on an analogy drawn 
from one special kind of capital, viz. durable goods. The idea that 
the use of capital is something distinct from the using-up of capital, 
and interest something different from the price of the principal, 
becomes untenable when the true economic nature of the " good " 
is understood as the sum of its material uses or services. If con- 
sumption is only a single exhaustive use, and use only a prolonged 
consumption, the payment for " use " of Capital must be included 
injbhe price of capital. 

In the Abstinence theory, which makes interest a compensation, 



made to the owner of capital, for his renunciation of immediate con- 
sumption, Bohm-Bawerk sees a confusion of the origin and accumu- 
lation of capital with the source and cause of interest. Abstinence 
will account for the owner having a sum to lend, but it will not 
account for that sum growing 3% larger in a year's time. 

Lastly, the Socialist or Exploitation theory, which makes interest 
simply a gain from exploited labour, is shown to be a theory which 
could only arise on the negative basis of the unsatisfactory accounts 
hitherto given, and on the positive basis of a mistaken value 
theory. When an income obtained without work and without risk 
was claimed as the reward of abstinence, and when all value was 
ascribed to the action of material labourers, it was inevitable that 
there should rise a reactionary theory proving that interest was 
robbery. Thus the board was swept clean for the Positive Theory 

A translator who does his duty must pass the work he renders 
through his own mind. The necessity this imposes on him of 
understanding his author, and getting at his point of view, should 
make him peculiarly sensitive to certain difficulties which are not 
removed by simple translation. Modes of thought, arrangement, 
manner of working, may remain foreign. A translator's preface, 
then, is not without justification if it anticipates some of the ques- 
tions that are sure to arise in the minds of readers more accus- 
tomed, perhaps, to English economics. Now as the main difficulty 
of the present work is that alluded to by Professor Bohm-Bawerk 
in his own Preface, that the strikingly simple outlines of his theory 
are obscured by the very elaboration and completeness with which 
it is worked out, perhaps the best service I can do is to give a 
short direct summary of the main argument, expanding on one 
or two points which seem to me to require commentary. 

Economic science being based on an analysis of the industrial 
life, the first question in a theory of capital is one of terminology : 
What does the practical world mean, and what has it hitherto 
meant, by the word Capital ? Here we find in common acceptance 
not one but two conceptions, both based more or less on Adam 
Smith's old distinction between National Capital and Individual 
Capital. It is quite necessary for scientific progress that the 
exact distinction between these two conceptions should be fully 
recognised, but it would be useless to refuse the name to either of 
them : the practical world would not follow us. On looking closer 
at the two, however, we can see that one of the conceptions really 
includes the other, and that the difficulty may be avoided by adding 
an appropriate predicate to each. Taking as basis the old root 
idea of " an interest-bearing sum of money," we may define^ 
capital in its widest sense (or Acquisitive Capital), as the complex 
of products destined to the Acquisition of goods. Under this, as 
narrower category, we put the conception that came later in time, 


but perhaps better deserves the name without predicate, that of 
Social or Productive Capital, comprising all products destined for 
the production of fresh wealth ; briefly, the complex of Intermediate 
Products. Thus we happily preserve in both conceptions the popular 
idea of income bearing " : society as a whole can only obtain 
an income by "producing" new wealth, while the individual may 
" acquire " it as well by the transfer of old wealth. 

By these definitions Land and Labour are excluded from capital. 
They have certain analogies, even close analogies, with it, but 
scientific accuracy is not gained by making definitions so wide as to 
conceal really discrepant elements. The definition of Social CapitaljB 
also excludes the Maintenance of Labourers ; for, obviously, to 
include the direct and most obvious means of living would be to 
take away all possibility of distinguishing between capital and con- 
sumption wealth. r~\ 

The subject, then, naturally divides itself into two parts : — Capital 
in the narrower, but more widely important, meaning of the Instru- i 
ment of Production, and Capital as the Source of Income. 

First, of the Instrument of Production. In the economical 
world man finds himself a being of infinite want, confronted with a 
universe full of potential wealth but with no tools except hands 
and brains to give him possession of it. Incapable of creating any- 
thing, he yet finds himself endowed with a power of moving things, 
which, as he masters the secrets of nature's working, gradually 

enables him to imprison, impress, or suspend the action of her 

powers, and so make her his servant. In various concrete ways he - " 
adapts or rearranges nature — never, of course, changing her laws 
or acting contrary to them, but varying the causal connection of 
natural processes in such a way that, to a large extent, he remakes 
the natural world to suit his purposes. Thus, between man and 
his natural environment there gradually grows up a third term, 
a machinery for the fuller satisfaction of man's life, and to this, 
in general terms, we give the name Capital. But, however the 
growth of wealth and industry disguise the fact, in all production 
of wealth there are only two original forces at work, nature's 
powers and man's powers. Human powers, as always limited, 
and as always put forth " at the cost of " brain or tissue, are all 
" economic " ; but in the great treasury of natural forces there are 
some powers so universal in their scope and working that they do not 
enter into calculations of cost. As we say, using two phrases whose 
full significance we do not always realise, we do not " economise " 
the free gifts of nature — they " cost " us nothing ; although they 
enter into the operations of all production, they do not enter into_ 
" economic " consideration. The original factors of production, then, 
are man and nature : the strictly economic factors of production - 
are labour and those natural forces (called by metonymy Land) 


which are limited and capable of being monopolised. But Capital, 
however much credit it gets and deserves for its work in present- 
day production, is no independent factor alongside of these. In one 
aspect it may be called " stored-up labour," in another — and more 
truly — " natural force stored up by labour " ; but in capital itself, 
alike in its origin and in its working, there is nothing that is not 
accounted for by the other two factors. 

We say, in its origin and its working, and it is advisable to 
emphasise that these are distinct things. The origin of capital 
is due to two factors, Industry and Saving, both being indis- 
pensable. It should be noted, however, that jvhat is saved is 
not capital but productive power. The primitive labourer works 
overtime, produces a surplus subsistence, and spends it in making 
tools : his saving is saving of strength to make tools. The modern 
worker produces a surplus over his subsistence : gives that over to 
banks and other agencies to be spent in building factories, erecting 
machinery, etc. : what is saved is the natural forces thus put in 
position to turn out consumption goods. But when we know 
the origin of capital, Ave have still to ask : What is the nature 
and character of the production carried on by means of capital 1 
The answer may be put in the following way. The aim of 
production is essentially the making or procuring of a living. 
The animal finds a certain provision spontaneously offered it in 
natufe ; goes straight toward that provision ; and never gets 
beyond it. Man, on the other hand, even in the simplest state, 
takes an indirect course. He allies natural with his own (still 
natural) forces; and he gets behind these natural forces, setting 
them against each other, or co-operating with each other in carry- 
ing out his instructions. He steals fire from heaven, and turns 
it against the gods. The end is always the consumption good — 
the good which exhausts itself in ministering to man's life in 
its higher and lower forms; the factors are always labour and 
nature ; but the way in which the end is reached is here indirect, 
lengthy, and roundabout. From the rude spade, which the savage 
first uses as a medium between his bare hands and the fruits or 
roots he lives on, down to the many years' production process 
stretching between the sinking of the shaft for coal or iron and 
the flying shuttles turning out the cloth which finds its goal in 
covering bare backs, is simply an evolution of the roundabout 
method. The course of economic progress puts increasing inter- 
vals between preparatory and finishing labour, decreasing the stock 
by increasing the tools ; and at every new stage labour embodies 
itself in further intermediate products or capital. The character- 
istic result is twofold. As we should expect from the accumula- 
tion and concentration of natural forces, this capitalist method is 
immensely productive as compared with direct or unassisted labour. 


On the other side, however, is to be put the sacrifice of Time 
necessarily involved in the indirect process. The relation of these 
two sides must be carefully noted. As time plays a greater part in 
production — as the average period is extended — the absolute 
productiveness of the capitalist process increases, but the relative 
productiveness decreases. That is to say : when the process has 
reached a certain point, it becomes subject to a law of diminishing 

The function, then, of capital in production may be said to be / 
that of allowing labour and natural powers to work out their 
economic effects in processes that take time, or the utilisation of , 
natural forces in roundabout methods. Or, if we adopt the 
peculiarly modern view that man is the economic Zielpunkt, we 
may say that capital gives time to labour to avail itself of those 
powers of nature which become available only at a considerable 
sacrifice of time. — i 

So much for the function of capital, and one is apt to jump to 
the conclusion that, having shown how capitalist industry produces 
a great quantity of products as compared with unassisted labour, 
the sole and sufficient origin of interest has been indicated. A little 
consideration will show that we are yet on the threshold of that 
inquiry. The concrete result — the raison d'etre — of a factory is the 
mass of products it sends to market. These are the transformed 
shapes of raw and auxiliary materials, machinery generally, and 
labour ; and the price realised for them repays the outlay on 
materials, keeps up the machinery, and pays the wages — including 
all the wages of intellect. But beyond the repaying of all these 
costs it is a familiar fact that, in normal production, the prices 

realised leave a surplus. This surplus is not accounted for by prcn 

fits, although often confused with them. Profit is either employer's / 
wage (and is thus already included), or it is the chance of a happy 
conjuncture that allows a higher price to be obtained than is 
normal — which chance is continually being levelled down by com-J 
petition. But this surplus is recognised as something due to the 
owner of capital without claim of personal work from him, and 
it is a surplus of value which competition cannot wipe out. In 
Bohm-Bawerk's former book, Capital and Interest, it was exhaustively 
proved that no theory had yet shown what capital does, or forbears 
from doing, that it should get this surplus under the name of interest. 
It is not a payment for the labour embodied in concrete capital, fori 
that labour is presumably fully paid for — say, by the machine maker 
to his men and to himself — and does not warrant a further continuous 
payment. It is not a payment for the working of natural forces 
embodied in the machine, for the value of the machine consists in 
nothing else than in the working of these forces, and in the price 
is already paid all the forces that the machine will put forth and 



mediate. And it is not wear and tear, nor is it insurance against 
risk, for in all normal undertakings these are provided for by 
|_ separate replacement and insurance funds. For proof of these 
statements I must refer the reader to that book, or the brief 
summary of it in the preface. What must be emphasised here 
is that the explanation of capital as the Instrument of Production 
is exhausted when it is shown that it allows nature and labour to 
work out their effects in lengthy processes. The source of interest 
will not be found simply within the sphere of production, for the 
reason that interest is a problem of surplus value, and value takes 
us into the sphere of distribution. Thus we come to the next 
division of the present work, Capital as it appears in the sphere of 
Distribution, or Capital as the source of the income called Interest. 

If we begin, as usual, by asking what business people under- 
stand by interest, we shall be told practically that a sum of money 
paid down now — say £100 — will buy a greater sum — say £103 or 
£105 — this day twelve months. Or if I owe £100 now for goods 
received, and do not pay the debt for a year, I have to add a y 
certain amount under the title of interest. 

The most obvious fact here is that the payment of interest has ' 
some very definite connection Avith the time when payment is 
made. This suggests the general question : What is the place and 
influence of time on the value of goods. And the answer is : It 
is an empirical fact of undoubted universality that present goods 
are valued more highly than future goods of like kind and amount^ 

For this three causes may be given. F@j^ is the difference] 
between the circumstances of want and the provision for want in 
present and in future. In any case, if want is pressing and pro- 
vision is scarce, value is high. But the pressure of want in the 
present is always with us, while as regards provision in the future 
it is generally true omne ignotum pro mirifico. Thus present goods 
obtain a permanent importance from felt present wants, and future 
goods a permanent unimportance from anticipated future provision. 
Most men, accordingly, — people in immediate distress and beginners 
of all sorts being types — are willing to~ pledge their future for a \ 
really inadequate present sum. SecQpfl., is the general under-H 
estimate of the future, common to humanity, and traceable to want 
of imagination, defect of will, or feeling of life's uncertainty. 
Children and savages are typical cf the improvidence which is 
more or less striking in all classes. It may be that this cause is 
not on the same level with the first, and tends to less importance 
with social progress. But, in the world as it is, it is certain that 
the things of the future are of less value to us simply because they 
are future. And, third, is the technical superiority of present goods. ' 
As we have already seen, in the hands of labour wealth increases 
enormously with the extension in time of the production process. 



Goods available now have accordingly the promise and potency of 
being greatly multiplied in the future, while goods coming into our 
disposal only in the future must undergo another period of pro- j 
duction before the same abundance is reaped. Of these three 
causes the first two are cumulative, the second alternative. The 
first group alone would account for a difference in value between 
present and future goods : the appearance of the latter makes the 
difference not only apparent but measurable. 

If, then, from so many sides and classes — from the young who 
expect to be better off, from the rich and improvident who wish to 
enjoy the present, from the industrious who wish to add to their 
wealth ; that is to say, from probably the majority of mankind — 
there comes an underestimate of the future compared with the 
present, it is easily explained why, as a rule, present goods have a 
greater value than future goods of like kind and amount. 

In this empirical and psychological fact, for the full treatment 
of which the reader is referred to Book V., our author finds the 
source of interest in its three principal forms. 

The simplest case of interest is that in which it appears in the ' 
loan for consumption. Here we have a real and true exchange of 
a smaller amount of present money, or present goods, for a larger 
amount of future money or goods. The sum returned, " principal " 
plus interest, is the market valuation and equivalent of the (c prin- 
cipal" lent. The apparent difference in value is simply due 
to our forgetting that £100 in^-crSrx hands now is not the same 
thing as £100 a year hence. ThisAgioion present goods is interest. 
In other words, interest is a complementary part of the price ; a | 
part equivalent of the. " principal " lent. - — ' 

In this simple case 'interest is more evidently the result of the 
first two causes just mentioned. Apart altogether from an organ- 
ised system of production th is agio w ould emerge, and has emerged, 
as something claimed by the saving from the unthrifty. But so 
long as there was no organic production, the circumstances of 
borrowers and lenders were too diverse and arbitrary to allow of 
a measured rate of interest. But when the third factor comes into / 
play, time becomes a condition of surplus product, and interest 
becomes measurable in terms of time. - I 

The second and principal form assumed, then, by interest is that 
in which it appears as part of the so-called "profit of undertaking." ^/' 
A capitalist employer hires land, buys raw and auxiliary materials, 
machinery, power, and labour. He sets these to co-operate in the 
making of a product. The product is the new shape taken on by all 
these productive goods, and we should naturally expect that the price 
obtained for it would exactly cover and reimburse the value of all the 
goods consumed in making it. But, as we know, after all ordinary 
costs are accounted for, the price obtained in normal economic circum- 


stances shows a surplus of value. The explanation of the surplus is I 
that productive goods, while materially and physically present, are, 
to economical consideration, future goods : that is to say, they are 
products in tlie making. The wants to which they minister, and 
from which alone they get their value, are future wants. On the 
admitted ground of equivalence between costs and products, then, ^ 
the value of the means of production must be the same as the value 
of the goods into which they pass. But these goods being in thej 
meantime future goods, and suffering from the discount which, as 
we have seen, is made on all future goods, the value of means of 
production must suffer the same discount. The undertaker inten- 
tionally turns his wealth into productive goods : that is to say, he 
exchanges his money for raw materials, workshops, machinery, 
labour. In the production process these ripen into present goods, 
with the full value of present goods. The price he receives for 
these recoups all his expenditure plus interest. Interest thus 
proves itself, as before, the difference between the formerly future 
and now present goods. „J 

There is a third case of interest which has some features so puzz- 
ling as to demand separate consideration : this is the case of income 
obtained from Durable Goods, usually called Hire or Lease, and, in 
one case, Rent. The distinction, between a perishable and a durable 
good is that, while both are the sums of their respective uses or 
services, the durable good is a sum extending over a period of time. 
But on our theory the later services of such a good must have a less 
value than the proximate services, and the total value of the good 
will be a sum of diminishing amounts. The " capital value " of such 
a good, then, will be to all appearance much less than the sum of the 
values really obtained during its lifetime. Here, as in the former 
cases, the services originally undervalued ripen to full present value 
in the hands of the owner, and the difference between the past and 
the present values, after providing for replacement of the good, is 
Interest. Thus if the owner of capital throws his parent wealth 
into the form of stone and lime, he possesses, in the durable shape 
of a house, a sum of future uses discounted according to their 
futurity. As each year passes one annual service is realised, and its 
value is thrown off, while each service still to be realised is one year 
nearer the present, and is thus one year more valuable. The house, 
as now containing one rent less, is less valuable, and this loss falls to 
be deducted from the gross return as wear and tear. But what is 
lo6t, be it noted, is not one annual service estimated at present 
value ; it is the last future service of which the good is still capable, 
— for if all the services have moved up one step in value it is the 
value of the last service that drops off. The difference between the 
present service realised (gross rent) and the last service now deducted 
(economic wear and tear) is the net return of interest. Thus, 


again, we find that interest is the difference between the formerly 
future and now present goods. This somewhat difficult point is 
made clear from the concrete figures on pp. 342-345. 

It will be seen that in this we have a theory, not only of durable 
consumption goods such as houses, and of durable productive goods _ 
such as machinery, factories, and fixed capital generally, but a theory 
which carries us beyond our formal definition of Capital into the 
sphere of Land. In land we have a durable good whose services will 
be rendered to generations unborn : the " last " service is, therefore, "" 
to the calculations of the present, nil : there is no economic wear 
and tear — no need of any fund for replacement — and the gross 
return suffers no deduction but is all interest. To put it concretely. 
A man buys land as he buys fixed capital ; — to get an interest from 
it. He buys its annual services or rents for a sum which represents 
the future services diminished in perspective. In other words the 
''capitalised value" is not an infinite number of years' rents but so 
many years' purchase. In his hands the future uses ripen into 
present : he gets the present value of what he bought as future 
value : as there is no wear and tear, nothing of this need be set 
aside for replacement : the whole gross rent is net interest. Ricardo, 
in pointing to the " original and indestructible powers of the soil " 
as the cause of rent, was right so far as his explanation indicated 
why the gross return was also the net, but wrong so far as it indicated 
that rent was due to the productiveness of this peculiar kind of 
durable good. The interest on a mine and the rent from land are 
essentially the same, although the one should wear out in thirty 
years while the other is " indestructible." — 7 

These are the simple outlines of the Positive Tlieory. By it I 
all three kinds of interest are traced to the one identical source, 
the increasing value of what are, either naturally or economically,] ^ 1 
future goods, as they ripen into present goods. But when dealing^^ 
with the principal form of interest, that in which it appears as 
part of the profit of undertaking, Dr. Bohm-Bawerk makes along 
excursus into the relation of wealth to labour, which is not the least 
suggestive and valuable part of the work. As it suffers somewhat, 
however, from its position in the text, I shall take the liberty of 
putting it in my own way. 

There are three markets in which the particular kind of " future 
goods " known as means of production are exchanged against 
finished present goods — practically against money : these are the 
Labour market, the Land market, and the market for Concrete 
Capital. Taking the Labour market as the most typical and the 
most' difficult, its prominent features are these. On the one 
side are the Capitalist Undertakers. These are men presumably 
possessed of a surplus of wealth which they cannot advantageously 
use in their own consumption ; to them personally, therefore, the 


present goods which constitute their surplus have per se no 
advantage over future goods. But in this surplus they have 
the means of waiting over lengthy processes of production As 
their wealth increases the average period of production is ex- 
tended, and with every extension the absolute productiveness of 
the process increases. On the other side is the majority of the 
population, the Wage-Earners. Their circumstances, as a class, are 
such that they cannot engage in any independent production that 
takes time. Even if they could, their production period would 
necessarily be short, and in competition with the long process the 
handicap would be too heavy. It may be assumed, therefore, 
that they will rather take service as "hands" than risk independent 

Evidently the big battalions are on the side of the capitalist, 
and in regard to this particular kind of present good, Labour, it 
seems to need no further demonstration that the price of it, namely 
Wage, will always be less than that of product, and thus allow the 
employer an interest. This is, in general terms and in a more dis- 
passionate way, the Socialist answer. But, while admitting, as we 
very well may, that there is enough and to spare of exploitation in 
profit generally, the question is by no means so simple as Socialist 
theory would have it. If there is force on the one side there are 
certain forces which work steadily on the other. The Trade Unions 
give the labourers a certain power of waiting, and tend to force 
employers, as a class, to give up at least that portion of profit which 
is pure exploitation Yet wage would not be explained if it were 
shown to be, in many cases, the exploitation of profit ! The inter- 
competition of capitalists, again, has surely been effective enough 
of late decades to force the remuneration of capital towards an 
economic — as distinguished from an exploitation — level. If there 
is no economic level of interest, why has it not been wiped out of 
existence altogether 1 The argument is one that Socialism itself 
often uses ; that, in some respects, the dependence of capital is as 
absolute as that of labour. It is necessary even for the status 
quo of wealth that the capitalist should bury his surplus in the 
fertile womb of earth, or in the living powers of man. 

But in the present state of economic development there is no 
question of mere preservation of wealth — there can scarcely be, 
so long as the seed sown returns some thirty, some fifty, some 
a hundred fold. The motive of the capitalist undertaker is 
certainly not preservation but inorease. He changes his wealth 
into means of production in order that the value of the products 
should be more than the value of the costs. He is warranted by 
experience in assuming that, at tlie worst, the price realised will 
contain a certain minimum rate of interest ; will, most probably, 
contain also a good wage for himself as master workman ; and that, 


possibly, a happy conjuncture may give him a " profit " besides. (Of 
course I am speaking of the enlightened employer who knows that 
" wage," technically, is remuneration for work done, and does not 
claim as wage more than, say, the remuneration of a Prime Minister. ) 
Where the employer and the capitalist are separate entities — as 
they always are to economic consideration — the motives also are 
distinct : the motive of the employer is wage and " profit " — using 
that ambiguous word in the loose meaning of gain beyond wage of 
superintendence and pure interest — while that of the capitalist 
is interest — with perhaps a chance of "profit" Now, as thus 
separated, the competition of capitals with each other becomes 
more intense ; for capital becomes a suppliant, not only to the 
labourer who demands the minimum wage, but to the class of 
employers who expect a perhaps extravagant -'wage of superintend- 
ence," and a " profit " besides. In this state of sharpened competi- 
tion the insufficiency of the exploitation theory becomes manifest 
to experience. We are forced to see that there is a level of interest 
which no amount of competition normally levels away, and we 
conclude that this is the economic level. Where the inter-competi- 
tion of capitals is the fiercest, the owner of wealth has not to 
content himself-with the mere preservation and re-creation of his 
wealth — much less pay a premium to labour for keeping it — but 
gets his minimum 2f % or 3% of interest. 

This explanation will be found if we turn from the question as 
between labourers and employers, and consider the larger question 
as between owners of present goods on the one side, and labourers 
and employers alike on the other. And here we come to Bohm- 
Bawerk's enunciation of a proposition which seems to me one of 
the most important in modern economics. It is that the supply 
of present goods, available in any community either as means 
of production to labourers or as subsistence to mere borrowers for 
consumption, is the sum of that community's existing wealth 
exclusive of land. No one nowadays hoards wealth, drawing on it 
as needed. Thanks to banking systems and facilities for invest- 
ment, nearly all wealth that is not actually being consumed by the 
owners is made available to supply this double demand. Disre- 
garding as before the demand for consumption, the effect of which 
is merely to lessen the amount of wealth available for productive 
borrowers — and remembering in passing that the agio on present 
goods is the joint result of these two collateral demands, we find 
this wealth confronting the demand of labour, transmitted through 
the employers, for the means of subsistence during the production 
period. Now, thanks to well-known motives, wealth in normal 
circumstances increases faster than population. As it accumulates 
it becomes possible for the labourers to extend their processes. 
Seed-time and harvest become separated, not by months but by 


years, and the amount of wealth in a community, as enabling labour 
to bridge over the long time of growth, becomes visibly the con- 
dition of its average production period, and so of its average pro- 
ductiveness. Thus to him that hath much much is given : the 
rich nation is the heir of the economic promises. 

From this it is not difficult to see that the value of means of 
production must always lag behind that of finished products. There 
is always a demand for ampler means of living, and the condition 
of obtaining ampler means is — time to extend the production pro- 
cess. So long, then, as the wants of spiritual beings call for fuller 
and finer satisfactions, and so long as the working life rises to 
higher levels, so long will there be a premium put on the present 
wealth which makes more ample wealth possible. Thus we are 
justified in saying that the demand for means of production will 
always be greater than the supply, and interest, as the agio on such, 
will appear in the price of products. 

The superficial resemblance of this Subsistence Fund to the 
generally discredited Wage Fund of the classical economists will 
not mislead any one who enters into the heart of Bohm-Bawerk's 
theory. The difference between the two will be found in the few 
pregnant sentences on pp. 419, 420. In case of misunderstand- 
ing, however, two cautions may be given here. One is that by 
" means of subsistence " must be understood, not simply food, nor 
even the common necessaries and comforts of life, but all that goes 
to the maintenance of the workers, whatever their various levels of 
comfort. It is not a certain wage fund, provided arbitrarily by 
capitalist employers, that is available for the simple " subsistence " 
of the working classes : it is the entire wealth of the community 
that is available for the maintenance of all classes of workers. The 
caution is much needed quite outside of this connection. I am 
persuaded that many people think they have determined the 
" cost " and due reward of labour when they have found how many 
weekly wages of 20s. are contained in the community's stock of 
wealth. The mischief that this idea does, in making people think 
that a rise of wages is a social calamity, is, to my mind, very great. 
To economic consideration, however, the line is a vanishing one 
which divides Hodge's beer and bacon from Plugson's venison and 
champagne. Rightly considered, the prices of books, the stipends 
of clergymen and teachers, the seats at theatres and concerts are 
" expenses of subsistence," just as much as the labourers' bread and 
cheese — unless we are to limit the category of " workers " to the 
20s. a week class. 

The other caution is that this wealth available for subsistence 
does not consist exclusively of goods already in the finished state. 
To put all wealth into this form, indeed, would be the greatest 
possible waste. What is required is, that the various means of 


subsistence should be ready when wanted, and this involves that, 
at any given time, the wealth of a country consists of products at all 
stages of maturity. To put it concretely : — At this moment the 
wheat is being sown that will feed human beings after next harvest, 
while the sapling is being planted that will not come to its full 
growth for a century to come : at the same moment, perhaps, the 
oak is being felled that began its growth a hundred years ago, and 
to-morrow the wood of it will enter into the framework of a thresh- 
ing-machine which will extend its life-work over a score of harvests : 
sapling and tree, machine and wheat, are alike parts of that wealth 
which is available for the labourers' demand in its continuity. 

Eemembering these cautions we can see the full import of this 
conception. It defines the true relation of wealth to labour in 
the following terms : The function of existing wealth is to subsist 
the workers during the interval between the beginning and the 
end of the social production period. This strikes us as strange 
mainly because of the bourgeois idea that wealth is the end and 
goal of labour, and the more vicious idea that labour is a tax on 
life. For certain purposes of economic study we may think of 
labour as the means, and consumption wealth as the end of pro- 
duction, but the economist falls into error whenever he forgets that 
economic life is an endless circle, where wealth, as subsistence, 
passes into muscle and brain, and muscle and brain pass into wealth 
again. Even when we rise — as the economist may do — to wider 
conceptions, and point to man's full free life as the goal of economic 
effort, we ought to recognise that the working life which we lead, 
and should lead, is at once an end and a mean. In working we 
live, and in working Ave produce wealth : this wealth, again, permits 
of freer work and fuller life. In correspondence with this, the type 
of labourer is not the man who produces on one day to consume 
on the next, but the man who consumes during his work day — who 
consumes while he produces — and, moreover, whose consumption 
increases with his production. The function of wealth, then, we 
say, is to support this working life, with its increasing claims, 
during its work. Thus instead of making wealth the final cause 
of industry — as the economist in virtue of his professional bias is 
apt to do — or making it the beginning and limit of industry — as 
the Wage Fund theory tended to do — this conception places wealth 
in the centre as the maintenance of the working world during its 
rise to higher and higher levels of working life. In other words, 
it puts the economic conception into line with the moral by making 
wealth simply the mean to the working life. 

If, then, interest is so purely a natural phenomenon, why has it 
met with so much covert dislike, and so much scientific opposition 1 
There are at least three reasons. First, the element on which all 
interest is based, namely time, has come to be a peculiarly important 


factor in modern production. All things come to him who waits, 
and, in economic life, this describes the capitalist. But this fact 
involves that the labouring classes who cannot wait, and cannot 
compete with the productiveness of lengthy processes, are put in a 
position of peculiar dependence : hence the possibility of exploitation 
of wage, of usurious rates of interest, of unjust rents. Second, from 
a moral point of view, there is much that is objectionable in the fact 
that interest allows certain classes to live without working and to 
make this possibility hereditary in their families. Third, in this in- 
come there is no ratio between gain and desert. Those who have little 
must accept Savings Bank interest for their hard-earned shillings ; 
those who have much have all the chances of bonds, mortgages, 
joint-stock investments and the like. All the same, so long as men 
do put a different valuation on present and future goods, interest 
cannot be prevented. Even a Socialist state could not prevent it : if 
by forcible means it were stopped between individuals, it would still 
obtain between commune and labourer. The state in this case would 
replace the capitalist, and " exploit " the worker in the same way — 
although, it may be hoped, -with a clearer view to the wellbeing of 
the exploited — but no organisation could make interest into wage. 

In Book VII. Dr. Bohm-Bawerk passes to the most difficult 
part of the subject, the Rate of Interest. Here, however, we 
shall find him using terms which are* scarcely intelligible without 
some knowledge of the theory of value enunciated by Jevons and 
Menger, and now held practically as the fundamental doctrine of 
the Austrian school. The formulation of this theory, so far as 
was necessary to the theory of capital, occupies Books III. and IV. 
of the present work. It is not possible, unfortunately, in the 
short space at my disposal, to give anything like an easy account 
of this theory. I have already found difficulty enough in putting 
it into the compass of my own Introduction to the Theory of Value, 
and all I can hope to do here is, perhaps, to assist the reader w!k> 
finds any difficulty in the text. <£. 

The essential points are as follows. Value is altogether based 
on utility, and the amount of value is determined, not by average, 
but by final or marginal utility. The subjective value of a good, as 
distinguished from its utility, lies in its being the indispensable 
condition of some satisfaction of want : the amount of value it 
obtains is determined by the last use to which it, or a similar good 
of the stock, is put in the then circumstances of want and provi- 
sion for want. Thus the utility of a bushel of corn is given it 
by its power of supporting life : its value comes from the fact 
that it is so limited that some human want depends on it for satis- 
faction : the amount of its value is determined by the least use 
to which the bushel is economically put in the circumstances of 
the consumers on the one hand and the amount of the harvest on 


the other. Thus value has no absolute level ; it is neither intrinsic 
nor relative to any personal or material average : it is always found 
in the relation of these two determinants of Want and Provision. 

Price, or Exchange Value, again, is a superstructure on this 
subjective value, determined by the competition of buyers and 
sellers with each other and among themselves. Under a simple 
barter system each party in a market would put a subjective value 
on the goods changing hands, as having a direct bearing on his own 
wellbeing, and would base the amounts offered and asked on this 
valuation. With organised industry comes the money valuation, 
where the comparative use value of goods to people generally 
becomes reflected on a money scale, and it becomes more definite 
and intelligible to say a thing is worth so many shillings than to 
say it is worth so many other things which admit of direct valua- 
tion in terms of satisfaction of want. Buyers and sellers, then, 
come together in markets with a definite valuation in their minds 
of what the goods or the money is worth to them. Thanks 
to the differences in subjective scales, it is the interest of both 
parties, and it is possible for both parties, to get an advantage by 
the exchange, although their interests diverge in regard to the 
amount of advantage that each may get. In this competition the 
goods pass from the "most capable" sellers to the "most capable" 
buyers, and the price is fixed between the valuations of the two 
"marginal pairs," viz. the last buyer and seller and the first un- 
successful buyer and seller. The level, again, of these marginal 
pairs is determined by the relation of the wants of both parties to 
their economical provision. It must be added that, in an organised 
economy, " utility " becomes a more complex conception. In the 
case of a manufacturer the utility of raw material is not the personal 
uses to which he can put his own products, but the uses to which 
he, as a manufacturer, can put the raw material, and these, again, 
are determined by the wants of his customers. The direct use of a 
good is here replaced by the employment of the good, and the " most 
useful " is translated into the " best paying," or " most remunerative." 
And this emergence of the professional producer, who makes for 
the market and to whom his produce has really no subjective value, 
simplifies the calculation of the marginal pairs by eliminating 
the subjective valuations of the sellers, and determines the price at 
the valuation of the last buyer. 

This law does not, as one would suppose, come into collision 
with the old law that value is determined by costs of production. 
The Law of Costs is one amply confirmed by experience as regards 
the great mass of articles produced under free competition. But 
this empirical law was never thought to determine the value 
of goods produced under any other conditions. The point on 
which it requires amending is that it should be expressed as a law 


of equality between costs and products. The old theory not only 
said that the value of goods tended to an equality with that of 
the means of production, but went on to put the causal relation 
exactly the wrong way about. As we have said, it is human want 
that gives value to goods ; and that value is thi'own back upon the 
means of production without which the goods cannot come into 
existence, and which are really the goods in a previous state of 
existence. In developed economy it is true that there comes a 
reflex influence from costs to products. If a group of means of 
production is capable of making goods which for the moment have 
different marginal utilities, the value that is transferred to the costs 
is the value of the last or marginal product made from these costs. 
In time, no doubt, competition forces this value again on to the 
other products, thus giving the impression that the value comes 
from the costs : but the fact is that the very value which these 
costs have, came from their product — not, however, from this or 
that particular product, but from the marginal one. 

Now the immediate point of connection between the theory of 
value and the theory of interest is that the problem of interest, in 
all its manifestations, is nothing more than a problem of price, the 
commodity bought and sold being — Present Goods. When, then,^ 
we go on to the final question, the Amount or Rate of Interest, 
what we have to remember is that here, as in price transactions 
generally, we have a resultant of subjective valuations, and that the 
determining elements we have to deal with are the extent and , 
intensity of the subjective valuations of buyers and sellers. We_j> 
have already seen what is the extent of this supply, and we know 
the motives which weigh with the owners and determine its intensity. 
The demand, again, comes from those who borrow to consume, and 
those who borrow to produce. Of these two co-ordinate demands 
Ave shall, as before, confine ourselves to the more important and more 
difficult, and to its most important section, the Wage-Earners, refer- 
ring the reader to Bohm-Bawerk's last two chapters for the other 
sections. One way of looking at this demand would be to consider 
it, not as a direct demand from the wage-earners, but as interpreted 
and in certain definite ways modified by the undertakers. But it is 
perhaps better to consider the undertaker as the owner of capital, 
and take the question simply as one between Wage -Earners and 
Capitalists. In the following argument, then, we assume that the 
demand conies exclusively from labour, that the entire supply and 
demand meet in one single market embracing the v/hole community, 
and that all branches of production show the same scale of surplus 

If wage Avere a fixed point — say determined at the subsistence 
level, as the Iron Law assumes — the calculation of the rate of in- 
terest would be comparatively easy. Say that every added £100 


of capital permitted simply a further extension of process. Every 
extension of process assures an extra product. But where capitalist 
industry is well developed, the increments of product at each exten- 
sion diminish relatively to those preceding, and there comes a point 
where the increase of product does not balance the expense of 
extension. To put it in familiar terms : an employer making 10% 
on his own capital, and offered loans at 4%, may profitably extend 
his business by borrowing although at every extension he makes a 
smaller profit. But when the extension made possible by the last loan 
returns him only 4%, there is no inducement to extend further. In 
this case the rate of interest would be determined by the " last dose 
of capital " economically applied, to use Thiinen's phrase. 

But the great difficulty is that wage is not a fixed amount. 
The value of labour to the employer depends upon anticipated pro- 
duct, and that product depends on productiveness, and productive- 
ness depends on length of process, and thus we have no fixed point 
from which to start. Bohm-Bawerk's solution is the following. The to( ^ 
fixed point which we cannot get in wage is got in another way. 
As in the theory of money it is well known that any quantity of 
currency, small or great, will effect the necessary exchanges, so here 
the available quantity of present goods offered for sale will buy up 
the whole of the available labour. This is due to the circumstances 
already spoken of — the need of the labourers to hire themselves out, 
and of the capitalists to hire out their wealth. The few cases of 
unemployed labour and capital may be left out of account, as, 
obviously, it is only because of bad organisation that there are such^ 
When the proportion of wealth and of labourers changes, all that \ 
is required is to contract or extend the production period. Granted 
this assumption, then, — that~aT~any moment labour buys up the 
available " wage fund," — the rate of interest is determined on the , 
ordinary lines of the formation of price. The period will be extendedj 
till such time as the marginal employment of the unit of capital is 
reached ; that is, till the extra product gained by extension of process 
is outweighed by the diminishing productiveness of the process. 

To put this difficult argument in a way perhaps more easy to 
grasp. Say that at any given moment there is a certain amount of 
wealth diyided out among the wage-earners as subsistence. In any 
case there will be some agio on this wealth, and there will be an ^ 
average production period. If now wealth increases faster than 
population — in Great Britain it increases more than twice as fast — 
there must be some disturbance of the equilibrium at present estab- 
lished. The new wealth will seek for employment, and find it — 
not, of course, in offering higher wages, for there is still nothing in 
increased wealth to increase product — but in extending processes. 
But as, presumably, Ave have now entered the stage of progress 
where extension of period gives decreasing surpluses, the return to 



this last employment of wealth, will be less than before. This 
marginal employment will bring down interest generally : the rate 
will be determined by the last extension of the production period : 

x> -JU60VI wage will rise relatively to interest : and the equilibrium be found 
at a new level. If population increase, wealth and productiveness 
remaining constant, the converse will be the case : wage will fall 
and interest rise because the community is brought back to a pro- 
duction period where the absolute product is less, but the relative 
surplus, due to extension of process, is greater. If, lastly, product- 
iveness increase, wealth and population remaining constant, the 
same phenomenon will take place, owing to the decreasing progres- 
sion of surplus returns being for the moment checked. 

Thus we can see that the three concrete factors which determine 
the marginal extension of process, and thereby the rate of interest, 
i are the amount of the national Subsistence Fund, the numbers of 
the working Population provided for, and the degree of Productive- 
ness reached in the industrial development. To quote our author's 
words, " interest will be high in proportion as the national subsist- 
ence fund is low, as the number of labourers employed by the same 
is great, and as the surplus returns connected with any further 
extension of the production period continue high, and vice versa." 

All this is in perfect harmony with the known facts of interest. 
It explains how as a country grows wealthy the rate of interest falls 
while wages rise ; how an increase of population without a corre- 
sponding increase of wealth has a tendency to raise the rate of 

^vtf-ft^ interest and depress wages ; and, finally, how inventions which 
increase productiveness tend to raise the rate. 

It is not within the scope of my task here to follow Bohm- 
Bawerk in gradually adding on the other elements required to make 
the picture true to the actualities of life, and to show that they 
make no material change in the principles laid down. Enough has 
been said to give the outlines of a theory which challenges attention, 
both by the originality of its ideas, and the thoroughness of its 

My thanks are due, first of all, to Dr. Bohm Bawerk, who has 
materially added to the value of this rendering of his work by 
giving it the stamp of his revision : to Professor Edward Caird, of 
Glasgow, and Professor M'Cormick, of Dundee, for many valuable 
suggestions and corrections : to Miss Christian Brown, of Paisley, 
who has again put me under heavy obligation by most carefully 
revising my proof-sheets : and to two other of my students who 
have spared me many weeks of thankless work by deciphering and 
rewriting my crabbed MS. 

Glasgow, June 1891. 


It has taken me longer than I expected to follow up the 
publication of my Geschichte undKritik der Kapitalzins-Theorieen 
by the present work. The heavy part of The Positive Theory 
of Capital lies in the theory of Interest. In the other portions 
of the subject I was able, at least on the whole, to follow in 
the footsteps of previous theorists, but for the phenomena of 
interest I had to put forward an explanation which breaks 
entirely new ground. 

I make this latter statement with some confidence. It is 
quite true that my explanation of interest rests on certain 
important ideas previously put forward by Jevons. But 
Jevons did not give them that special application which might 
have made them serviceable towards the explanation of interest 
— if they had been taken in connection with certain other 
lines of thought not then familiar to Jevons. Thus it is that, 
in his interest theory, Jevons remained under the spell of the 
old classical opinions, notwithstanding these new lights which 
came to him from another quarter and were applied to other 
ends. And, moreover, as the ideas common to both of us were 
not borrowed by me from Jevons, but discovered in entire 
independence — indeed long before I became acquainted with 
Jevons's writings — I feel bound to take on myself, for good or 
ill as events may prove, the entire and undivided responsibility 
for the interest theory now put forward. 

As regards the way in which I have treated the subject, 
I may be allowed to make two remarks. 

The method of statement adopted for the most part 
throughout this book is that which people generally — not 
without a suspicion of passing judgment on it — call " abstract." 


All the same I contend that my theory does not contain one 
single feature which is not based on true empirical principles. 
There are various ways of being empirical. We may obtain 
the facts of experience which serve us as foundations from 
economic history, or we may gather them from statistics, or we 
may try to get them directly in our common daily life by 
simple informal observation. No one of these three methods 
has any monopoly : each of them has its separate and peculiar 
sphere. In the nature of things the historical and the statis- 
tical method treat the matter of experience in much ampler 
fashion, and gather it from wider fields of observation ; but for 
that very reason they fail, on the whole, to seize any but the 
larger and more apparent facts : they put economic events, as 
it were, through a large sieve, where a great many delicate 
and unobtrusive, but, perhaps, more essential features of 
economic life, escape unnoticed. If, then, we would rescue 
these and make them objects of economic investigation — 
and for very many scientific problems we simply cannot do 
without taking cognisance of them — there is nothing for it 
but to have recourse to the comparatively narrow but always 
impressive personal observation of life. 

Now I have endeavoured to make full use of all three 
methods of investigation. What help economic history and 
statistics could'afford me in my task I have thankfully accepted 
and conscientiously made the most of, even where I have not 
explicitly mentioned the original materials with which I 
worked. But the matter thus obtained was not by a long 
way sufficient for my purposes. The theory of capital has to 
reckon with a number of facts which history and statistics 
have not recorded, partly because in their nature they could not, 
partly because attention has not hitherto been drawn to the 
importance of these facts. What, for instance, could history 
and statistics say about the question which is so important in 
the explanation of interest, as to whether there is in perishable 
goods an independent enduring use ? How much, again, could 
we get from them as to the actual grounds on which are based 
the different subjective estimates of present and future goods ? 
Or what have we learned — up till the present at least — as 
to the relation between the amount of the national subsistence 
fund and the average production period in a community ? In 


matters like these one is obliged, for good or ill, to turn to 
other sources of information, and other paths of knowledge 
than those of history and statistics. 

And if proof be needed that I was right in doing so, and 
that indeed it was impossible for me to do otherwise, I may 
appeal to witnesses whose authority, as regards this question, 
is beyond dispute, nameiy, the leaders and adherents of the 
" historical school " itself. For full thirty years the historical 
and statistical tendency has been the prevailing one in German 
economics. During the w T hole of this long period there has 
not been even an attempt to solve the great problem of interest 
by the tools of the historical method, although this problem 
has always occupied a front place in economical discussion. 
Perhaps the nearest attempt to a really historical treatment 
was that of Eodbertus, with his famous statement of the 
different forms under which, in various ages, the ruling econ- 
omic classes have always drawn the better part of the product 
of the nation's labour to themselves. But, accurately speaking, 
Eodbertus, in these historic flights, aimed only at winning assent 
to his exploitation theory, while the characteristic feature of 
that theory is that it makes use from end to end of the abstract- 
deductive machinery of the classical school, the labour theory of 
Eicardo. Or to mention only the recognised leaders of the 
historical school j — Eoscher has put together his interest theory 
out of elements taken partly from J. B. Say, partly from Senior 
— -that is to say, altogether from " pre-historic " theory ; while 
Knies, following Hermann, invents a theory of the " use " of 
goods, which not only has nothing in the world in common 
with history and statistics, but, as I at least believe, dispenses 
with any inductive foundation whatever, and is the result of 
simple speculation — and not even happy speculation. 

If, then, the historical economists themselves, when brought 
face to face with the problem of capital, have not trusted to 
their peculiar method, and have taken to a kind of investigation 
generally foreign to them, I cannot be reproached if I take the 
same course as they do. I am free — at least I try to be free 
—from any onesidedness of method. In my opinion there is 
no one royal road of investigation : to my mind that way is 
good which leads to the goal of knowledge in the individual 
case. And sometimes that will be the one, sometimes the 


other method, according to the different nature of the individual 
problems that present themselves. In the present case I 
imagine that I have employed the method of research which was 
most suitable to the special nature of the theoretical problems 
of capital — abstract in form, but empirical in essence ; and 
indeed, as seems to me, empirical in a truer sense than can be 
assigned to the investigations which the historical school has 
directed towards the same end. 

The second remark I should like to make is this. The 
fundamental ideas of my interest theory are, I believe, unusually 
simple and natural. Had I been content to arrange these ideas 
in a more concise form, avoiding all casuistical matters of detail, 
I should have put forward a theory which, in small compass, 
would have produced the impression of being exceedingly simple, 
even verging on being self-evident. So far as power of carrying 
conviction goes, this would certainly have been ah advantage, 
and, if I have forborne to seize that advantage, it was only after 
full consideration. The fact is that, in the theory of capital, there 
have been so many plausible views put forward and subsequently 
found false, that I must expect to find the public very critically 
disposed, and indeed must presume that my best and most 
careful readers will be the most critical. In these circum- 
stances it appeared to me more important to make the structure 
of my theory secure than to make it easy and pleasant reading. 
Thus I decided to encumber my work with numerous demon- 
strations, details, exact figures, and so on, rather than leave 
room at critical points for doubts and misunderstandings. 

In this direction one circumstance gave me particular trouble. 
In a theory of any range and any difficulty there are points which, 
by reason of some casuistical peculiarities or other, are not 
always quite easily explained, even when the general principle 
which will give their solution is already known ; and, so long 
as those points are not distinctly traced back to the general 
principle, they stand like so many living objections to its 
correctness. As it happens, there are a good many such points 
in the two theories so closely connected; — that of value and 
that of capital. Now in the theory of value I had experienced 
how unexplained questions of this sort may stand seriously in 
the way and hinder the acceptance of the best grounded general 
theories, — for I am convinced that people have been so long 


prevented from getting right views on the nature and laws 
of value only because they stumbled at certain striking facts, 
which, to hasty consideration, seemed to contradict these views, 
while in truth they were only complicated cases requiring 
casuistical treatment. To save my theory of capital from a 
like fate I tried to anticipate objections of this sort, and 
remove them by suitable digressions. Naturally I did not 
deal with all conceivable objections, but only with those which 
seemed to me likely to crop up in the minds of critical readers, 
and which, at the same time, seemed difficult enough to warrant 
a special explanation : all the same it gave me occasion to go 
into more detail than was favourable to the fluent statement 
of mv theory. 

Thanks to all this I have arrived at a result as paradoxical 
as it is natural : that the very trouble which I took to clear 
difficulties out of the way has given my theory a certain 
appearance of difficulty. Unsuspicious of these hidden and 
dangerous rocks, many of my readers, I doubt not, would have 
sailed safely over them, while I, knowing them so well, and 
trying to steer a safe but laboured course, have made the 
journey long, difficult, and troublesome. I trust, however, that 
something may be put to my credit in this regard ; for, after 
all, no one could very well expect to arrive at the solution of 
a problem of such recognised difficulty except through earnest 
and laborious thinking. I may at any rate take this oppor- 
tunity of asking one favour of my readers ; — that, if they have 
once read my theory with all its casuistical detail, they would 
go over it a second time omitting the detail. If in this way 
the leading ideas are put directly together again, and cleared 
of all superfluous elaboration, I venture to think that the 
theory will again produce that impression of simplicity and 
naturalness which is warranted by the simplicity of its con- 
stituent ideas ; an impression which I may have sacrificed to 
a critical precaution that was perhaps exaggerated, but was 
not altogether without justification. 

This book was already well through the press when Carl 
Menger's Contribution to the. Theory of Capital appeared in 
Conrad's Jahrbiicher (vol. xvii. part ii.) I very much regret 
that it was then too late for me to make full use of that most 
interesting and suggestive work, and, in particular, that I could 


not do more justice to its author in my critical notice of the 
historical development of the conception of capital. Unfortun- 
ately by the time it appeared the first part of my book, — that 
which deals with the conception and nature of capital, and 
touches most closely on this work of Menger, — was already 
printed off. 

For the same reason I could not notice the important work 
of Wieser on Natural Value, which only came to my hands 
during the printing of my last chapter. 

E. Bohm-Bawerk. 

Innsbruck, November 1888. 


Introduction. The different sense attached to the word Capital in the spheres 
of Production and Distribution. Division of the subject into Capital the 
instrument of production, and Capital the source of interest pp. 1 — 3 


Chapter I. Man and Nature. The unity of all science demands that 
economics builds on certain fundamental truths pertaining rather to the 
natural sciences. Connection of Happiness, "Wants, Satisfaction, Goods, 
Use, Production. Man's contribution to production — the "moving of 
things " — as deciding where and when natural forces shall act. Limitations 
of our mastery over nature : our allies — knowledge, and the division of 
nature against herself. ....... pp. 7 — 16 

Chapter EL The Nature of Capital. The roundabout method of pro- 
duction. Illustrations. Its great results as regards product are an 
admitted fact of experience. The explanation ; — that by getting control of 
one power we can bring it to bear on other powers, and through many 
members obtain a cumulative result. This enlisting of natural forces is 
capitalist production, and capital is nothing but the complex of inter- 
mediate products which emerge at the various stages on the roundabout 
journey of production ....... pp. 1 7 — 23 

Chapter III. Historical Development of the Conception. Originally 
it appeared as an interest-bearing sum of money. Turgot expanded this into 
money or goods. Adam Smith divided goods into consumption goods, and 
income - bearing goods or capital, noticing a distinction in the latter, which 
was developed by his followers into the categories of National and Indi- 
vidual capital. It escaped notice, however, that these were two entirely 
independent conceptions, and hence the confused idea that capital bore 
interest because it was productive. Definitions of Hermann, Menger, 


Klein wachter, Jevcms, Marx, Knies, Walras, M'Leod, Kiihnast. Various 
interpretations of the terms "goods" and "means of production " in these 
definitions • • • PP- 24—35 

Chapter IV. The True Conception of Capital. The principles of a good 

definition. Capital in general (Acquisitive or Private capital) is a group 
of products which serve as means to the acquisition of goods. Under this 
we put the narrower, hut perhaps more important, conception of Social or 
Productive capital, the complex of intermediate products, or products 
destined for further production pp. 36 — 41 

Chapter V. The Competing Conceptions of Capital, (l) Those includ- 
ing Consumption goods as well as acquisitive instruments — the "national 
subsistence fund," Roscher's "products saved for further production," 
Knies's "goods applicable to the satisfaction of want in the future." (2) 
Those including Labour : the strong objections to this. (3) Those includ- 
ing Land as well as products of labour — a classification which, indeed, has 
some advantages. (4) Those making still stricter limitations — Klein- 
wachter, Marx, Jevons. (5) Metaphysical conceptions — M'Leod and 
Kiihnast PP- 42—60 

Chapter VI. Social and Private Capital. This division is not coin- 
cident with that made by Rodbertus and Wagner into purely economic 
capital and legal property in capital. The groups of goods embraced in 
each of our categories. Should "warehoused consumption goods" and 
"money" be included in social capital? Should the maintenance of 
labourers ? Emphatically this latter is not capital, but consumption 
wealth PP- 61—72 


Chapter I. Introductory. The two questions answered in the present 
book : How does capital originate, and what is the nature of its work in 
production ? The unsatisfactory answers up till now are principally due to 
the neglect of describing facts before explaining them . . pp. 75 — 77 

Chapter II. Capitalist Production. Recapitulation. The sole technical 
factors in production are nature and labour, but, as we economise only 
where we have not superfluity, the limited natural agents — briefly, uses of 
land — and labour are the sole economic factors. In capitalist production 
the roundabout way, while securing increased products, is attended by the 
sacrifice of Time. This is at the root of the dependence of labour on 
capital. Every lengthening of process involves some increase of product, 
but not in equal progression. The "production period": — the average 
time between the expenditure of uses of land and labour and the turning 
out of the finished consumption good pp. 78 — 91 


^Chapter III. The Function of Capital in Production, (l) It is 

symptomatic of the adoption of the roundabout method. (2) As storing 
up natural power it is a tool to further production. (3) It is an indirect 
cause of new processes, as giving off, in consumption goods, the main- 
tenance of labourers, and leaving them free to invest their labour and 
natural agents in lengthy processes. Thus capital is not an independent 
productive power, but an intermediate product of nature and labour — a 
medium through which they both work. The claim of independence 
would never have been made but for the assumed parallelism between 
factors of production and branches of income . . . pp. 92 — 99 

^>Chapter IV. The Theory of the Formation of Capital. Capital, both 
in its origin and its growth, is the result of production and saving — not 
necessarily a direct saving of capital, but of consumption goods which leave 
labour and land free to produce capital .... pp. 100 — 105 

^Chapter V. Formation of Capital in a Community. At any given 
moment the capital of a community consists of a mass of intermediate 
products, some at different stages of the same length of roundabout journey, 
others at the same stage of processes of different lengths. Representation 
of this by concentric circles, the outer — that nearest consumption — being 
the largest, both in kinds of products and amount of capital invested. 
Detailed proof of the proposition of last chapter, and demonstration that, 
alike in socialism and in individualism, saving is necessary 

pp. 106—118 

-?" Chapter VI. Possible Objections, (l) That most capital is not fitted for 

immediate consumption, and that there is thus no abstinence in not con- 
suming it — which does not affect the fact that, for the formation of capital, 
productive powers must be withdrawn from the service of the present, 
although it is a reasonable argument against those who confuse saving with 
moral desert. (2) That saving must be a saving of surplus, and surplus is 
due to industriousness — all the same, the product of industry must not be 
consumed but saved. The true place of saving as directing nature and 
labour towards the production of capital, not of consumption goods. (3) 
That non-consumption is a pure negative — which has force only against 
those who elevate saving into an independent factor of production. This 
brings us, then, to the further question : Why do people save capital, 
and we must before going further find a basis for our interest theory in 
the theory of value pp. 119 — 125 



^ Chapter I. The Two Conceptions of Value. The old division into Use 
value and Exchange value we shall replace by Subjective value (importance 
to human wellbeing) and Objective Exchange value (purchasing power) 

pp. 129—132 


Chapter II. Nature and Origin of Subjective Value While all goods 
by definition have a certain relation to human wellbeing, there is a 
difference between usefulness, the general capacity to subserve wellbeing; 
and value, the indispensable condition of wellbeing. For the emergence 
of value there must be scarcity relative to demand, else we should not 
economise ......... pp. 133 — 137 

Chapter III. The Amount Of Value. From the foregoing the amount of 
a good's value would seem defined by tbe amount of wellbeing actually 
dependent on it. But this is confronted by the old paradox that bread 
has little value and diamonds much. The solution will be found in accurate 
examination of what really is the amount of wellbeing dependent on any 

■ goods, and to get at this we have to put two questions. First : when we 

speak of satisfaction of want (economic wellbeing) do we mean kinds of 
want or concrete feelings of want ? The older theory made the mistake of 
saying the former, and so considered that which satisfied the most vital 
needs the most valuable. Whereas the slightest casuistic consideration 
shows that we measure the importance of a good by its relation to the. 
concrete want as it arises, and not to the totality which constitutes the 
kind. Representing kinds of wants and concrete wants in a typical 
scheme, we can see how little the kind tells us of the urgency of the con- 
crete want ... ..... pp. 138 — 145 

Chapter IV. The Marginal Utility. Second : where a good is capable 
of satisfying wants of different importance, which is the dependent want 
the satisfaction of which determines value ? The answer is • — the one 
which would fail of its satisfaction without the good ; that is, the least 
important among those actually satisfied. Thus value is determined by 
Marginal Utility. Illustration of the sacks of corn. In industriallife the 
familiar fact that quantity is in inverse ratio to value is an empirical 
statement of this law : the more goods there are of a kind the less urgent 
is the last want satisfied, and vice versd. Thus we have the natural 
explanation why bread has little value and diamonds much pp. 146. — =153 

Chapter V. Complications. We must be careful to determine in each 
case what is the marginal utility. For instance, (1) in assessing the value 
of a durable good, or a collective good (like a harvest), we have to sum up 
the importance of many concrete wants : (2) the value of most goods is not 
determined by their own, but by a foreign utility, that of goods substituted 
for them, either by purchase or production — a principle of wide application 
in present economic life . . . . . . . pp. 154 — 158 

Chapter VI. What determines Marginal Utility. It is the relation 
between wants and their provision. If wants are many and intense and 
provision is scant, there are many unsatisfied layers of want, and the 
marginal utility is high, and vice versd. Thus a good has many subjective 
values, and goods generally have different values to different classes of 
society pp. 159 — 161 

Chapter VII. Alternative Uses. When a commodity admits of different 
kinds of use, it is the highest marginal utility — the marginal utility of the 


most useful employment — that decides its value : the other (excluded) 
employments usually have no influence on practical calculations 

pp. 162—165 

Chapter VIII. Subjective Exchange Value. Organised exchange gives 
almost every good a second value — the indirect importance which it has 
for human wellbeing through its capacity of being bartered for goods which 
directly affect human wellbeing". Where this and subjective use value 
compete, value is decided by the higher (alternative) employment of the two. 
Illustration of how subjective and objective exchange value may move in 
different directions ....... pp. 166 — 169 

Chapter IX. The Value of Complementary Goods. Where several 
goods co-operate towards -one utility the value of the complete group is the 
value of the group's marginal utility, except where all the members are — 
replaceable. If each member is irreplaceable, and has no use outside the 
group, then one member has the value of the whole group. But where the 
members are capable of other (though less remunerative) employments, 
each member has one value as complement and another as isolated. Lastly, 
where some members are replaceable, these members never have any greater 
value than that given them in isolation outside, while the irreplaceable 
member gets the remainder of the group value. The far-reaching bearing 
of this on the distribution problem .... pp. 170 — 178 

Chapter X. The Value of Productive Goods. Value and Costs. 

It has generally been held that the value of goods is regulated by the costs 
of their production. But, adopting Menger's division of goods into ranks, 
it becomes evident that productive groups only get their value (if value is 
importance for human wellbeing) from the last link in the chain, the final 
consumption good. Thus the value of the productive groups and of the 
final product must be substantially the same, and costs of production are 
regulated by the marginal utility of final products, although each group 
has its immediate measure in its particular intermediate product. Appeal- 
ing to experience, the well-known law of costs, affirming the identity of 
costs and products although putting the causal connection the wrong way 
about, confirms this. The identity, however, is disturbed by two causes — 
(1) irregular fluctuations, (2) the normal divergence in which interest 
emerges. Looking now to the fact that one group of productive goods 
may pass into products with different marginal utilities, we find that it is 
the marginal utility of the least remunerative employment that determines 
value. But once value is thus given to costs, it in turn, where goods are 
freely produced, transmits itself to the other products. Thus the law of 
costs, when understood as a particular law of value, is quite correct, and is 
not in contradiction with the universal law of marginal utility 

pp. 179—189 



Cb&pter L The Fundamental Law. The motive of exchange in general 
is the striving after economical advantage : postulates of this motive. The 
condition of exchange — that the exchangers put different values upon the 
commodity and the equivalent price. The most capable exchanger — the 
one who attaches most value to the good and least to the equivalent 

pp. 193—197 

Chapter II. Isolated Exchange. Here price is determined somewhere 
between the subjective valuation of the buyer as maximum and that of the 
seller as minimum ....... pp. 198 — 199 

Chapter III. One-sided Competition. Where there are several buyers 
and one seller, price is determined between the subjective valuation of the 
actual and that of the most capable unsuccessful purchaser : where there are 
several sellers, between that of the actual and that of the most capable 
excluded seller pp. 200—202 

Chapter IV. Two-sided Competition. The course of competition between 
several buyers and several sellers shown by an illustrative scheme, proving 

(1) that transactions are closed between the most capable competitors, 

(2) that price is determined by the valuations of the marginal pairs, (3) 
that there is an exhaustive analogy between the formation of price and 
that of subjective value, and (4) that price is, from end to end, the resultant 
of subjective valuations. The effect which the various groups of valuations 
have on price ........ pp. 203 — 213 

Chapter V. The Law of Supply and Demand. The price zone 

determined by the marginal pairs may also be characterised as that within 
which Supply and Demand are in equilibrium. In two cases, the price of 
money and the price of labour, this latter formula is even more exact 

pp. 214—217 

Chapter VI. The Individual Determinants of Price. The level (high 
or low) of the valuation of the marginal pairs is a resultant of the number 
and intensity of the desires on both sides. Analysing this into factors we 
find (1) extent of demand, (2) intensity of demand — the latter further 
analysed into the buyers' subjective valuations of the commodity and of the 
equivalent price, (3) extent of supply, (4) intensity of supply — the latter 
further analysed into the sellers' subjective valuations of the commodity 
and of the equivalent price. But where commodities are made for sale 
the sellers' subjective valuations fall out altogether, and price is determined 
by the valuation of the last buyer .... pp.218 — 222 


Chapter VII. The Law of Oosts. The law that price tends to equality 
with costs of production seems at first sight to contradict our law. But 
the concatenation is really the following. The consumers' subjective 
valuations for each class of commodity determine the consumers' demand. 
Against this stands supply of the particular commodity. The valuations 
of the marginal pairs determine its price. This price again determines 
the extent and intensity of the manufacturers' demand for raw material, 
and this material passes to the most capable buyers at the valuation of the 
last buyer. Thus it is the least remunerative employment (the market 
equivalent of the subjective marginal utility) that determines the value of 
the cost goods. What gives colour to the law of costs is the subsequent 
phenomenon, that the value thus given to cost goods by marginal product 
is then transmitted from these costs to products of originally higher marginal 
utility. Explanation of cases where the movement of price seems to be 
from costs to products, as in improvement of processes : increased supply 
changing the level of subjective valuations, and lowering the marginal 
utility. The symmetry between costs and products is disturbed by two 
causes — (1) general friction, (2) the lapse of time. This leads us to the 
consideration of the effect of differences of time on the valuation of goods 

pp. 223—234 


Chapter I. Present and Future in Economic Life. Our general 
economic conduct has more reference to the future than we are always 
conscious of. Not feeling future sensations we yet anticipate and compare 
them, and the greater part of our wealth in the present consists of goods 
getting ready for the future. As future feelings are commensurable so are 
future goods, our basis of valuation being the marginal utility which they 
will bring us in the future. It should be noted, however, that the element 
of objective uncertainty in future goods has nothing to do with the pheno- 
menon of interest : it is simply a premium against risk. Our fundamental 
principle, then, is, that present goods have a higher subjective value, and 
thus a higher price, than future goods of like kind and number. This is 
the resultant of the causes mentioned in the three following chapters 

pp. 237—248 

Chapter IL Differences in Want and Provision for Want. Here two 

cases are typical — (1) that of immediate distress, (2) where economical pro- 
spects for the future are hopeful. In these cases present goods are obviously 
valued more highly than future. Even where the future does not promise 
better provision than the present, the shilling in my pocket, as a durable 
good, avails for the present, for the future, and for any chance that may 
turn up meantime. The exceptions to this — as in some perishable goods 
— are insignificant ....... pp. 249 — 252 


Chapter III. Underestimate of the Future. Men, civilised as well as 
savage, generally underestimate the future simply because it is future. 
Three reasons for this : (1) want of imagination, (2) defect in will, (3) 
the uncertainty of life. The latter obtains directly only as regards long 
periods, but by a species of arbitrage this underestimate is put into a 
definite percentage which obtains for all periods. This second factor com- 
bines with that of last chapter to increase the agio on present goods 

pp. 253—259 

Chapter IV. The Technical Superiority of Present Goods. As we 

know, methods of production which take time are more productive — not only 
as regards units of product, but as regards value. Tables to prove this is 
so, even independent of the influence of the other two factors. The same 
superiority attaches to present goods simply as consumption goods, in so 
far as command over such goods leaves our means of production free for 
investment in lengthy processes. This is the source of Jevons's mistake in 
considering subsistence as the only capital . . . pp. 260 — 272 

Chapter V. Co-operation of the Three Factors. The action of the first 
two is cumulative, that of the third alternative, but the three really co- 
operate towards the same end, the preference for present goods. For the 
reasons already given, all classes — needy, careless, rich, saving — find some- 
thing in present goods superior to future. These subjective valuations 
meeting in a market determine a price which contains an agio : this agio, 
once established, has a reflex influence on subjective estimates, and a 
developed exchange system gradually levels arbitrary valuations into a 
normal rate ......... pp. 273 — 281 


Chapter I. The Loan and Loan Interest. Here we have the simplest 
case : the exchange of two goods, one present, the other future, with the 
agio necessarily on the former. Misunderstandings of this in the past. 
Knies's answer to the criticism of the Use theory in Capital and Interest. 
Principal plus interest is the equivalent in future goods of the principal 
lent in present goods. A loan without interest is a sale below market 
price pp. 285—298 

Chapter II. The Profit of Capitalist Undertaking. Principles of 
Explanation. The business of the capitalist is to buy goods of remoter 
rank, and transform them into consumption goods, his gain being called 
"profit." One point must be made clear before going further ; these pro- 
ductive goods are economically future goods, and subject to the same dis- 
count as the future consumption goods into which they are ultimately 


changed. This is the explanation of the so-called cheap buying. The 
capitalist gets his profit simply from the ripening of the future goods in his 
hand into present goods ...... pp. 299 — 303 

Chapter III. The Profit of Capitalist Undertaking. Complications. 

(1) Our estimate of future goods is graduated according to the intervening 
time : corresponding with this the value of productive goods rises steadily 
as the process goes on, and the increased value is transferred from branch 
to branch of production. (2) Durable productive goods contribute differ- 
ent parts of their contents to products maturing at various points of 
time, and so unite the characteristics of durable and of productive goods — 
of which later. (3) Productive goods admit of various employments turn- 
ing Out different products at different periods ; how then can they be 
valued in present goods ? — In the marginal utility of such goods the future 
as well as the present uses have already been taken into consideration, the 
possible future uses being reduced to present value. It remains for us now 
to confirm these theoretical conclusions by appeal to the actual markets 
where means of production are exchanged for present goods pp. 304 — 312 

Chapter IV. The Profits of Capitalist Undertaking. The Labour 
Market. Assuming that, over the community, an average two years' 
process is turning out a product worth x per week, supply here will be 
represented by a great number of labourers ready to accept much less than 
x rather than work in short unproductive processes. The demand comes 
from the undertakers, who must find it their interest to sell their goods to 
labour. What wage can they pay ? In simple circumstances they could 
employ their capital in extending their own processes, and so increase their 
return. If, instead, they use it to pay labourers, they must gain more in 
the buying of labour than they lose by dispensing with the extension of 
their process. In modern complex circumstances the capitalists, who are 
not, as a rule, workers, lend their capital, through the channels of organ- 
ised credit, to those who wish to make their labour more productive, and 
find an agio already in the market. But Loan and Labour markets alike 
are parts of the great Subsistence market we have now to examine 

pp. 313—318 

Chapter V. The Profit of Capitalist Undertaking. The General 

Subsistence Market. A fundamental proposition : The fund available 
for advances of subsistence consists of the entire wealth of a community 
exclusive of land. With the exception of the small amount consumed with- 
out return or wasted, and that consumed by independent producers, all 
wealth comes to this great market, and is, directly or indirectly, advanced 
to labour. It may be objected that wealth in many forms, such as tools, 
is not subsistence. But all that is required is that wealth should be 
changed gradually into subsistence as the workers of the successive stages 
require it. The subsistence fund, then, includes not only finished goods, 
but goods at all stages of progress, and goods going through all lengths of 
process. Thus the average production period possible in a country depends 
on the amount of its wealth. Proof that the amount of subsistence required 


before entering on any process must be sufficient for a little over half the 
production period ........ pp. 319 — 328 

Chapter VI. The Profit of Capitalist Undertaking. The General 

Subsistence Market {continued). To find the price at which finished 
present goods exchange against future on the subsistence market, we must 
examine more carefully the extent and intensity of supply and demand. 
The demand consists of (1) wage-earners, (2) independent producers wish- 
ing to extend their processes, (3) borrowers for consumption. Thus it is 
easy to see that the demand must always be in excess of the supply : that 
an agio must appear : and that, as putting the drag on undue extensions of 
process, this agio is as healthy as it is inevitable. Finally what is true of 
labour is true of uses of land and of intermediate products. Error of 
Socialist theory in not seeing that so-called "cheap buying" is true of 
these as well as of labour ...... pp. 329 — 338 

Chapter VII. Interest from Durable Goods. The value of a durable 
good being a sum made up of all the material services inhering in it, 
the single service may obtain an independent value and price. "Where 
a good lasts for years the remote services suffer the same discount of value 
as future goods in general. But as each service is given off, the remaining 
services, by one year's approximation to the present, grow one year more 
valuable, and each year the parent good loses the value of the most remote 
service still inhering in the good. Thus what the owner gains is the gross 
present value of the annual service thrown off : what he loses (wear and 
tear) is the value of the most remote service : the difference between these 
two is the net return of interest. Thus our theory gives a simple answer 
where Productivity, Exploitation, and Use theories found only a stone of 
stumbling. Obviously also it gives the natural explanation of Capitalisa- 
tion pp. 339—349 

Chapter VIII. Interest from Durable Goods (continued). In durable 
goods that are also productive goods we find a double phenomenon : although 
the good has perished in giving off its successive services, the services thus 
incorporated in the process remain bound up in it till its completion : thus 
it bears interest after it has ceased to exist, but the interest is now ascribed 
to the circulating capital in which the services have been incorporated, and 
not to the "outlay." An important application : — If a good is infinitely 
durable, the capitalised value is infinitely small compared with the sum of 
successive services : the last service is infinitely small, and wear and tear 
vanishes : the gross return and the net return are one. Here then we get 
the explanation of land rent, as simply a special case of interest obtained 
from durable goods. The bearing of this on the Ricardian theory 

pp. 350—357 

Chapter IX. Results. Owners of capital, then, are merchants in present 
goods, and such goods being more valuable than the "future goods," 
Labour, Uses of land, and Capital, the agio or interest included in the 
price is only reasonable. Circumstances may often produce exploitation 


and usury, but in the essence of interest. there is nothing unjust ; as in all 
human institutions, we have to balance advantages with drawbacks, and 
the balance swings in favour of interest .... pp. 358 — 364 

Chapter X. Interest under Socialism. Even here, as time does not 
stand still, the causes of interest would still be active. Suppose all other 
sources stopped, if durable goods were exchanged for less capitalised value 
than the full sum of all their future services the agio of interest would 
emerge. Indeed under Socialism the state would "exploit " the labourers — 
perhaps to divide out the amount more equitably, but still to divide it as 
interest, not as wage ....... pp. 365 — 371 


Ghapter I. The Rate in Isolated Exchange. Our present task is to 
point out the concrete circumstances that influence the valuations on both 
sides. First, of isolated exchange. In the production loan what deter- 
mines the subjective valuation of the suitor is the amount he will gain by 
extending his process. But as, beyond a certain point, the surplus returns ■ 
decrease as processes extend, a present loan has less value in proportion to 
the length of process already provided for . . . pp. 375 — 380 

Chapter IL The Rate in Market Transactions. First assuming that 
the demand comes from the wage-earners alone, how high will rise the 
agio ? Here we meet a special difficulty. The price of labour is the 
resultant of subjective valuations of buyer and seller, but what value can 
the capitalist put upon the labour he wishes to buy when it will bring a 
different product and value according to the length of process in which it 
is invested, and when, again, the process he will adopt depends upon the 
wage he must pay? The "fixed point" is found in the fact that the 
existing stock of wealth can always buy all the wage labour offered. This 
gives a certain definiteness to the average length of process, and so the 
product on which the capitalist bases his valuation. But again it may be 
a long process at a low wage or a short process at a high wage. The final 
answer is, that the wage offered must bring subsistence and number of 
workers to • equilibrium in such a way that neither party can disturb it by 
under-bidding or over-bidding. Or, to put it positively : The rate is 
determined by the productiveness of the last economic extension of process, 
in such a way that the amount of capital making the extension possible 
must bear a less interest than the surplus return obtained by means of it — 
which is pretty much identical with Th linen's "last dose of capital" 

pp. 381—394 

Chapter III. The Rate in Market Transactions {continued). 
But what are the concrete determinants which decide the degree 


of productiveness of the last extension ? If, ceteris paribus, subsist- 
ence increases, the same calculations as before show that equilibrium 
cannot be maintained without an extension of process, an increase of wage, 
and a fall of interest — the latter accounted for by the fact that men can 
only keep the increased wealth employed by extensions of process which 
involve decreased surpluses. If, on the other hand, subsistence falls, 
equilibrium demands contraction of processes, fall in wage, and rise in 
interest. If, again, population rise or fall we have the converse results. 
Lastly, if productiveness increase, ceteris paribus, interest will rise along 
with the surplus now yielded by the last extension. Thus we conclude 
that there are three decisive factors which affect the rate of interest, and 
this is confirmed by history and experience pp. 395 — 402 

Chapter IV. The Market for Capital in its Full Development. And 

now to give the features of actual life to our abstract scheme. It makes 
no difference to our argument that product and wage vary from employ- 
ment to employment : the essential matter for interest is the relation 
between the two. Nor does it matter that in actual life the annual 
increment due to extensions of process varies from employment to employ- 
ment : capital follows an isohypse of surplus returns, not of periods of 
production, but this does not alter the essential circumstances on which 
our law rests. Again, there are other demands besides that of the wage- 
earners — (A) that for consumption credit, completely co-ordinate with the 
other, (B) that of landowners who require subsistence proportioned to the 
length of their production processes, (C) that of capitalists themselves, 
although their claim on subsistence is effect and not cause of the agio. 
Lastly, we may enumerate the seven concrete factors in the interest rate 

pp. 403—412 

Chapter V. The Market for Capital in its Full Development {con- 
tinued). To look now at the struggle between immediate consumption 
and accumulation. In good economical management present and future 
will be alike considered, and provision made that the present consumption 
shall not reduce the level of future enjoyment. Thus parent wealth should 
be saved, and evien some portion of income. The two great deviations 
from economic conduct are due (1) to the perspective undervaluation of 
the future and (2) to the neglect of exact calculation of the future's claims. 
Differences between our theory and that of the Wage Fund. Finally, the 
actual market for capital is not one great undivided market, but a great 
number of part markets all communicating and arbitrating each other's 
prices. Conclusion ....... pp. 413 — 424 

Appendix to page 327 pp. 425—426 

Index of Authors mentioned . . .pp. 427—428 


In systems of Political Economy the word Capital and the 
theory of Capital are regularly met with in two distinct 
spheres ; first, under Production, and, second, under Distribu- 
tion. In the former case capital is represented as a factor or 
tool of production : as an instrument which men use to extort 
from nature the various forms of wealth unattainable by simple 
labour. In the latter case capital appears as a source of 
income or a rent fund ; and we are shown how, in the division 
among the various members of society of that wealth which 
has been produced in common, capital acts like a magnet, 
drawing a portion of the national product to itself, and deliver- 
ing it over to its owner : it appears, in a word, as the source 
of Interest. 

When, we are told that capital assists in the production of 
wealth, and then again that it assists in the obtaining of 
wealth for its owner, we are apt to jump to the conclusion 
that the two phenomena are intimately and essentially con- 
nected, and that the one is the immediate result of the other — 
that capital can bring wealth to its owner because capital assists 
in the production of wealth. As a fact, Political Economy 
has taken up this idea only too readily and too completely. 
Captivated by the deceptive symmetry that exists between the 
three great factors of production — Nature, Labour, Capital — 
and the three great branches of income — Pent, "Wage, and 
Interest — the science, from Say's day till the present, has 
taught that these three branches of income are nothing else 
than the payment for the three factors of production, and that 



Interest in particular is nothing else than the compensation 
which capital receives for its productive services when the 
product is divided out among society. Propounded by various 
interest theories in various forms -this idea has found its most 
concise and, at the same time, its most naive expression, in 
the well-known " Productivity theories " — those theories which 
explain interest directly as the natural fruit of a productive 
power peculiar to and resident in capital. 1 

In beginning the study of the theory of Capital, it cannot 
be too emphatically stated that this idea, simple and natural 
as it may appear, contains a prejudgment calculated to pre- 
clude unbiassed consideration of the problems of capital. If 
there were no other objection, the fact that the word capital is 
never used exactly in the same sense in the two spheres of 
phenomena must give us pause. True, all capital which serves 
as a tool of production is also capable of bearing interest, but 
the converse is not the case. A dwelling-house, a hired horse, 
i circulating library bear interest to their respective owners 
without having anything to do with the production of new 
wealth. If, in the sphere of distribution, the conception of 
capital thus embraces objects which are not capital in the 
sphere of production, this alone is sufficient to show that the 
bearing of interest cannot by itself be an indication of the 
productive power of capital. We have not to deal with one 
motive power transmitting itself to two different spheres ; not 
even with two groups of phenomena which have grown up so 
intimately connected that the explanation of the one is got 
fully and entirely through the explanation of the other ; but 
with two distinct classes of phenomena. Thus we have two 
distinct subjects, which give us material for two distinct 
scientific problems ; and finally, we have to seek for the 
solution of these problems by two distinct and separate roads. 
It so happens, however, that these really distinct problems are 
accidentally linked together by one name ; they are problems 
of Capital. It may be that, besides identity of name, we shall 
find many inner relations between the two series of pheno- 
mena and the two problems ; — our investigation shall decide 
that later. But such relations are yet to be discovered ; they 
must not be assumed ; and unless we would give up all idea 

1 See my Capital and Interest, 1890, p. 111. 


of being unprejudiced in our quest and in our conclusions, we 
must begin the inquiry free from any preconceived opinion of 
a necessary identity, or even of an exact parallelism, between 
the productive efficiency of capital and its power of bearing 

Our division of the subject will correspond to this real 
independence of the two problems. In one part of the 
present work we shall take up the theory of Capital as a Tool 
of Production, and in another the theory of Interest. But 
we shall first devote a separate book to the attempt to obtain 
some insight into what Capital itself is, in conception and 





There is scarcely a system or a text-book of Political Economy 
which does not, at some point or other, bring in discussions of 
matters belonging to the physical sciences. Usually these are 
introduced in the chapter on Production. There we are 
taught that 10 create new goods does not mean to create new 
material, since matter is constant and cannot be increased. 
We learn what nature contributes to the work of production 
in the shape of materials and powers ; what is done by the 
mechanical, what by the chemical, and what by the organic 
powers of nature ; what importance climate, heat, moisture 
have on the development of production ; on what physical and 
technical foundations the working of machinery rests ; and 
many things of this sort. 

To the principle of this custom no sensible person will 
object. It is the form in which, consciously or unconsciously, 
we pay homage to one of the weightiest principles of our 
knowledge, the unity of all science. Ever since Bacon we 
have recognised that no single branch of inquiry explains to 
the very end the facts with which it deals, but breaks off at 
some point or other, and passes on its facts to some sister science 
for further treatment, so that the total explanation is only 
given by the totality of all the sciences. Thus it is that if 
one would not set before his readers simply a collection of 
barren fragments, he must add to what is distinctively depart- 
mental at least so much as will connect 'it with the related 
sciences in the organic whole of human knowledge, and thus 
indicate the way in which the explanations begun by him 
may be concluded. 

8 MAN AND NATURE book i 

It would, however, be rather impertinent if we theorists 
were to think that such terminal truths — as we may appro- 
priately call them — are added only for purposes of statement 
and for the good of our readers. Rightly employed they 
are of much greater use to ourselves as scientific inquirers. 
They may be an effectual means of preventing us from lightly 
building our whole system, or parts of it, on air, and uninten- 
tionally maintaining in the name of Political Economy some- 
thing which, in its assumptions or conclusions, is, physically 
or psychologically speaking, nonsense. I must not be mis- 
understood however. It is not in the least my meaning that 
Political Economy should assume a nature foreign to it, and 
become natural science or psychology ; what I do mean is 
that it must never be in contradiction with these sciences. 
What is false in natural science or psychology is false in all 
and every science. And to prevent us unwittingly running 
counter to certain fundamental truths, perhaps the best way is 
to put these truths explicitly in black and white before our eyes. 

Now the subject with which we have to deal in this work 
is of such a nature that it very specially requires to be based 
on sound natural principles, and a very great deal may be lost 
by neglect of this. I have therefore strong reasons for 
following the good old custom, and prefacing my theory by 
some fundamental truths that stretch over into the neighbouring 
sphere of the natural sciences. I shall endeavour not to abuse 
the opportunity by inflicting a mass of learned scientific detail 
on the reader. The few truths I mean to start with would 
indeed, in a professional classification, be put within the sphere 
of the natural sciences, but they are of so general a character 
that, practically, they are outside departmental limits, and 
belong to the commonwealth of knowledge. They are known 
and recognised by everybody, and, in one form or other, they 
have been expressed all along in our economic literature. 
There is really only one thing that, I should like to think, 
will distinguish my use of them : I shall try so to put them that 
they will not be mere paragraphs introducing the theory, but 
will remain present and living in the spirit of it. Usually these 
excursuses into the domains of physics are placed in some corner 
of economical books rather for ornament than use. In one 
chapter they are made much of; in the next they are forgotten 

chap, i GOODS 9 

and contradicted. In what follows I shall try to avoid this 
error, and wherever anything depends upon these fundamental 
truths — which will very often be the case in a discussion on 
capital — to keep unobtrusively but firmly in touch with them. 
In this way, while there is no fear of our economical theory 
obtaining the character of a theory of natural science, it will 
not be one that runs counter to physical facts. 

Men strive after happiness. This is perhaps the most 
general and, certainly, the most vague expression for a complex 
of strivings, all of which have for object the bringing about 
of such occurrences and conditions as we know and feel to be 
pleasant, and the averting of those we know to be unpleasant. 
Instead of " striving after happiness "' we may use the expres- 
sion " striving after self-preservation and self-development," or 
" striving after the greatest possible furtherance of life " ; or 
we may, with equal propriety, use the words, "striving after 
the most complete possible satisfaction of wants", for the 
expressions we are so familiar with in economic terminology, 
"want** and "satisfaction of want," mean, in the last resort, 
nothing else than, respectively, the unsatisfied craving of 
man to be put under conditions he thinks desirable or more 
desirable than those he has, and the successful obtaining of 
such conditions. 

The whole world, as we know it, is subject to the law of 
cause and effect ; no effect can take place without sufficient 
cause. From this law man and his conditions have no exemp- 
tion ; none of those beneficent changes of condition, which we 
call " satisfactions of want," can come about otherwise than as 
the effect of a sufficient cause ; every satisfaction presupposes 
an adequate instrument of satisfaction. The adequate instru- 
ments for the satisfaction of human wants, or — what is the 
same thing — the causes of beneficent changes in human condi- 
tions, we call goods. 1 

The man who " wants " finds goods in different spheres of 
the world in which he lives ; he finds them in the world of 
persons as well as in the world of things. For obvious reasons, 
which need not be discussed here, we use the word " good " in 
somewhat different ways in these two spheres. On the one 

1 See Menger, GrundscUze der Volkswirlhschwftslehre, p. 1. Vienna, 1871. 



hand, we designate by the name of goods not the persons who 
are of use to us, but only the acts, the services, through which 
they are of use ; on the other hand, we give the name to the 
impersonal material shapes themselves, and call them Material 
as opposed to Personal goods. 

In what follows we have to do with material goods only. 

Material goods are part of the external world ; they are 
natural things. As such they are, in constitution and action, 
wholly and entirely natural products, and subject to natural 
laws. The fact that men's goods are instruments towards the 
personal ends of the " lord of creation " gives these goods no 
kind of immunity from complete subordination to the natural 
order, any more than man himself is able to emancipate the 
natural side of his being from similar control. Material goods, 
therefore, come into existence only as natural laws allow and 
demand that a material shape, thus and not otherwise consti- 
tuted, should come into existence. They pass out of existence if 
a new combination of natural powers, working according to 
natural laws, results of necessity in the dissolution of their 
former material shape. They cannot exert the smallest effect, 
be it useful, hurtful, or indifferent to men, unless the given 
coincidence of materials and powers under natural laws pro- 
duce this very effect and no other. 

These seem peculiarly trifling propositions. They are 
trifling enough to require no formal proof; indeed, no one 
will seriously dispute them. But, simple and trifling as 
they are, on certain tempting occasions these fundamental 
truths have been lost sight of, and theories have been 
put in circulation which implicitly contradict them. The 
theorist, therefore, has good cause to emphasise them, and even 
follow out their logical conclusions to a certain extent into 
those departments where they have to do duty as, peculiarly, 
the fundamental truths of economic theory. These depart- 
ments are the function of goods and the origin of goods ; in 
other words, the theory of the Use of goods, and the theory 
of the Production of goods. 

The theory of the use of goods I have already gone into at 
length in Capital and Interest. 1 I there showed that material 

1 P. 219 (German edition, p. 265). See also my Rechte und VerMUnisse, p. 
51. Innsbruck, 1881. 

chap, i THE USE OF GOODS 11 

goods are nothing else than such distinct forms of matter as 
admit of the natural powers residing in them being directed 
to human advantage. I showed how the " use " they afford is 
realised through concrete activities of these natural powers, 
and, therefore, by real forth putting of power. I showed how 
a use (Gebrauch or Nutzung) cannot be made of them other- 
wise than by taking the peculiar forms of the energy of the 
good at the proper moment, supplying the conditions necessary 
to render them available where they previously existed in an 
unavailable form, and then bringing these forms of energy 
into proper connection with that object in which the useful 
effect is to take place. On these considerations I based the 
conception of the " Material Services " {Nutzleistungen) which 
I believe to be the only one that corresponds with facts, and 
rejected certain shadowy ideas which connected the old theory 
of interest with the word " Uses " of goods. What remains for 
us here is, on the same lines, to lay down certain fundamental 
ideas as to the origin of material goods. 

We have already said that the origin of natural goods lies 
entirely under the control of natural laws. No material good 
can come into existence except when a previous coincidence of 
materials and powers has made it necessary in physical law that 
exactly this form of matter should emerge. Looked at from 
the point of view of nature, the formation of goods is a purely 
natural process. Not so, however, from the point of view of 
man. Man has cause to lay emphasis on a distinction which 
is not visible from the purely physical standpoint. One 
great class of useful forms of matter comes into existence, 
without interference from man, as the product of favour- 
able coincidences of matter and force — a product which, from 
the teleological human standpoint, we should call accidental. 
Thus originate fruitful islands in the courses of streams ; thus 
the grass on natural pastures and prairies ; thus berries and 
trees of the wood ; thus deposits of useful minerals. But 
though in this way accident does much for man it does not 
do nearly enough. In nature left to herself we have on a 
large scale what we should have on a small one if we wished 
to make a definite picture out of coloured bits of stone, and, 
instead of piecing the picture together deliberately, were to 
put the bits of stone into a kaleidoscope and wait till accident 

12 MAN AND NATURE book i 

shook the planless stones into the wished-for picture. Among 
the infinite number of ways in which the working materials 
and powers might combine there are, in the one case as in the 
other, a countless number of possible effects, but only a few 
favourable ones ; and in the natural undisturbed course of 
things these few turn up too seldom for man, with all his 
wants, to rest content with them. Accordingly he interposes 
another factor in the natural process, his own consciously 
directed energies — he begins to produce the goods he 

To " produce " : what does this mean ? It has been so 
often said by economists that the creation of goods is not the 
bringing into existence of materials that hitherto have not 
existed — is not " creation " in the true sense of the word, — 
but only a fashioning of imperishable matter into more 
advantageous shapes, that it is quite unnecessary to say it 
again. More accurate, but still exposed to misinterpretation, 
is the expression that in production natural powers are the 
servants of man, and are directed by him to his own advantage. 
If this proposition be taken to mean that man in any case can 
impose his sovereign will in place of natural laws, can at will 
" bully " natural law into making a single exception at his 
bidding, it is entirely erroneous. Whether the lord of creation 
will it or no, not an atom of matter can, for a single moment 
or by a hair's breadth, work otherwise than the unchangeable 
laws of nature demand. Man's role in production is much 
more modest. It consists simply in this — that he, himself a 
part of the natural world, combines his personal powers with 
the impersonal powers of nature, and combines them in such 
a way that under natural law the co-operation results in a 
definite, desired, material form. Thus, notwithstanding the 
interference of man, the origin of goods remains purely a 
natural process. The natural process is not disturbed by man 
but completed, inasmuch as, by apt intervention of his own 
natural powers, he supplies a condition which has hitherto 
been wanting to the origination of a material good. 

If we look more closely at the way in which man assists 
natural processes, we find that his sole but ample contribution 
consists in the moving of things. " Putting objects in motion " 
is the idea which gives the key to all human production 

chap, r PRODUCTION 13 

and its results ; — to all man's mastery over nature and its 
powers. 1 And this is so simply because the powers reside 
in the objects. Now when man by his physical powers — the 
power of moving things — is able to dictate where the object 
shall be, he obtains a control over the place at which a natural 
power may become effective ; and this means broadly a control 
over the way and over the time in which it may become 

I say a control over the way in which a natural power 
may become effective. Of course a pound weight acts as a 
pound weight and never in any other way ; whether it be a 
paper weight on a writing-table, or a counterpoise on a scale- 
beam, or whether it keep down the valve of a steam-engine, it 
never ceases to exert the force of gravitation with which its 
mass is endowed. But just because the expression of one and 
the same natural power always remains the same, results that are 
extraordinarily different may be obtained by getting it to work 
in different combinations — just as by adding like to unlike a 
different sum may be got every time. And so our pound 
weight, while in itself constantly acting with perfect uniformity, 
will, according to the different surroundings in which we place 
it, sometimes hold together a heap of papers on a writing-table, 
sometimes indicate the weight of another object, sometimes 
regulate the pressure of steam in the boiler. 

Again I say a control over the time in which a natural 
power may become effective. This proposition, also, must not 
be taken too literally. It must not be imagined that natural 
powers work intermittently ; that man can sometimes bring 
them to a standstill, sometimes set them working again. On 
the contrary, natural powers are always at work ; a natural 
power not active would be a contradiction in terms. But it 
is possible that several powers may be so combined that their 
activities may for a time mutually balance each other, and the 
resultant be rest — if not complete rest, still some movement so 
slight that, as regards human purposes, it may be neglected. 
When this is the case, before any new resultant can emerge 
that is of interest to man, there must be an entirely different 
combination of materials and powers. This suggests how man 
may get control of the point of time at which a definite resultant 

1 See Mill's Principles, i. 1. 2. 

14 MAN AND NA TURE book i 

emerges. It is only necessary for him, by skilful use of his 
power to move objects, to provide the causes of the desired 
effect, all but one. So long as this one is not present the 
conditions are unfulfilled, and there cannot be the desired 
result. But when at the proper moment he adds the last 
condition, the movement hitherto held in leash, as it were, 
is suddenly set free, and the desired effect is obtained at 
the opportune time. Thus the sportsman moves powder and 
lead into the barrel of the gun ; he shuts the breech ; he 
raises the cock. Each of these things has for long possessed 
and expressed its peculiar powers. In the powder are pre- 
sent the molecular powers whose energy later on is to expel 
the shot from the barrel. The barrel now, as formerly, exerts 
its forces of cohesion and resistance. The trigger which is 
to let the cock smash down, strains and presses against the 
spring. Still the arrangement, the disposition of the collective 
powers, is such that the resultant of their mutual energies is 
rest. But the sportsman covers the wild fowl with the barrel: 
there is a slight pressure on the tongue, a little dislocation of 
the arrangements, and the shot flies. 1 

1 If we were to carry our analysis of what man does in production a step 
further, we might appropriately distinguish three fundamental ways in which 
the producing man "moves things." The first is what, for want of a better 
name, we may call simple movements or changes of place — where men transport 
entire objects from one locality to another. Thus the miner brings the ore from 
the depths of the shaft to the upper air ; the merchant takes his goods from the 
place wheve they are produced to the place where they are demanded and used. 
The second embraces those movements of parts of one and the same object 
whereby it experiences a change of form, as when nails are made from iron, 
statues from marble, pipes from clay, dials from ivory, combs from caoutchouc, 
tumblers from glass, furniture from wood. The third,, and much the most 
common way, is where different objects are brought together in space to form 
combinations of matter. These combinations may be merely temporary, or they 
may be lasting. Instances of the one are where the stamp falls on the coin, 
the chisel chips at the marble, the carving tool is applied to the wood, the ore 
put into the furnace, the yarn into the loom, the paper under the printing press, 
the stuff uuder the shears, the plough through the clods. Instances of the 
other are where we build a house out of wood, stone, lime, iron, etc. ; where 
we put together a watch out of wheels, springs, pendula, weignts, stop-action 
and many other things ; in fact in manufacture generally. I must warn the 
reader that this division into three fundamental forms neither has, nor is meant 
to have, the character of strict scientific classification. Indeed, these forms merge 
in many instances into one another. Temporary combinations, for instance, are 
very often half-way to changes of form, and what I have called a simple change 


The same considerations which show us the kind of 
mastery man has over nature show us at the same time the 
measure and the narrow limits of his mastery. As we have 
seen, man has a certain power to make natural forces act where, 
when, and how he will ; but this power he possesses only in so 
far as he can control the matter in which these forces reside. 
Now the masses of matter, and therefore the masses of inert 
resistance, which have to be overcome before our purposes are 
served, are often immense, while the physical force which is at 
our command is very modest and comparatively trifling. Often, 
on the other hand, the matter is too fine to be manipulated 
by our rude hand. Our interests often call for infinitely 
delicate rearrangements of infinitely small pieces, and how 
unsuited are our clumsy fingers to deal with molecules and 
atoms ! How entirely incapable is the human hand of im- 
itating even one of those wonderfully delicate cellular tissues 
which nature flings out in thousandfold, every day, in every 
plant and leaf ! Thus human powers are doubly deficient ; 
they are too slight as against the mass, too rude as against the 
structure of the matter which they have to subdue. 

In those circumstances we should be very badly off for 
the wherewithal of production if we had not some real allies 
behind these doubly insufficient powers. One of these allies 
is the human mind. In investigating the causal relation of 
things we come to know the natural conditions under which 
the desired goods come into existence : we thus come to learn 
where human force can be applied with advantage and where 
not ; and thus we are taught to avoid exertions which are 
barren and choose those which are profitable. Human power 
so directed is like a small but well-officered army, which makes 
up in mobility, cohesion, and energetic use of opportunity, 

of place is at the same time, in a certain point of view, a material combination, 
a bringing together of the thing moved and the object (personal or impersonal) 
to which it is moved. This division, however, will make it easier to find our 
reckoning, and will prove too, if necessary, the correctness of the general char- 
acteristics which I have ascribed in the text to productive processes. I mean to 
say that it is easy to see that every productive activity which one can think of 
ranges itself under some one of these three fundamental forms, ami to that extent 
it is proved that such an activity must; a fortiori, range itself also under the 
general formula given in the text, where we have described the nature and method 
of the production of material goods as the mastery of natural powers by means 
of putting objects in motion. 

16 MAN AND NA TURE book i 

what it wants in numbers. Another powerful ally in the 
struggle against nature is nature herself. All that we are able 
to do in production would be wretchedly small were it not 
that, in the storehouse of nature, we find the means of dividing 
nature against herself and setting force against force. But here 
we touch on a subject which is, in itself, too important, par- 
ticularly as regards our inquiry, to admit of merely a passing 



The end and aim of all production is the making of things 
with which to satisfy our wants ; that is to say, the making 
of goods for immediate consumption, or Consumption Goods. 1 J 
The method of their production we have already looked at in a 
general way. We combine our own natural powers and natural 
powers of the external world in such a way that, under natural 
law, the desired material good must come into existence. But 
this is a very general description indeed o'f the matter, and 
looking at it closer there comes in sight an important distinc- 
tion which we have not as yet considered. It has reference 
to the distance which lies between the expenditure of human 
labour in the combined production and the appearance of the 
desired good. We either put forth our labour just before 
the goal is reached, or we, intentionally, take a roundabout 
way. That is to say, we may put forth our labour in such a 
way that it at once completes the circle of conditions neces- 
sary for the emergence of the desired good, and thus the 
existence of the good immediately follows the expenditure of 
the labour ; or we may associate our labour first with the more 
remote causes of the good, with the object of obtaining, not 
the desired good itself, but a proximate cause of the good ; 
which cause, again, must be associated with other suitable 

1 Merger has suggestively called these Goods of the First Rank, classing all 
goods which go to their production as Goods of Higher Rank. It is unfortunate 
that we cannot use the literal English equivalent of the " Genussgiiter," but, as 
next to it in convenience, I propose to use the expression Consumption Goods for 
what otherwise we should have to translate as Goods for Immediate Consumption. 
See Menger's Gruwdsiitze, p. 8, and Bbhm - Bawerk's Reekie und Verhdltnisse, 
p. 101. -W. S. 



materials and powers, till, finally, — perhaps through a consider- 
able number of intermediate members, — the finished good, the 
instrument of human satisfaction, is obtained. 

The nature and importance of this distinction will be best 
seen from a few examples ; and, as these will, to a considerable 
extent, form a demonstration of what is really one of the most 
fundamental propositions in our theory, I must risk being tedious. 

A peasant requires drinking water. The spring is some 
distance from his house. There are various ways in which he 
may supply his daily wants. First, he may go to the spring 
each time he is thirsty, and drink out of his hollowed hand. 
This is the most direct way ; satisfaction follows immediately 
on exertion. But it is an inconvenient way, for our peasant 
has to take his way to the well as often as he is thirsty. And 
it is an insufficient way, for he can never collect and store any 
great quantity such as he requires for various other purposes. 
Second, he may take a log of wood, hollow it out into a kind 
of pail, and carry his day's supply from the spring to his 
cottage. The advantage is obvious, but it necessitates a 
roundabout way of considerable length. The man must spend, 
perhaps, a day in cutting out the pail ; before doing so he 
must have felled a tree in the forest ; to do this, again, he 
must have made an axe, and so on. But there is still a third 
way ; instead of felling one tree he fells a number of trees, splits 
and hollows them, lays them end for end, and so constructs 
a runnel or rhone which brings a full head of water to his 
cottage. Here, obviously, between the expenditure of the 
labour and the obtaining of the water we have a very round- 
about way, but, then, the result is ever so much greater. Our 
peasant needs no longer take his weary way from house to well 
with the heavy pail on his shoulder, and yet he has a constant 
and full supply of the freshest water at his very door. 

Another example. I require stone for building a house. 
There is a rich vein of excellent sandstone in a neighbouring 
hill. How is it to be got out ? First, I may work the loose 
stones back and forward with my bare fingers, and break off 
what can be broken off. This is the most direct, but also 
the least productive way. Second, I may take a piece of 
iron, make a hammer and chisel out of it, and use them on 
the hard stone — a roundabout way, which, of course, leads to 


a very much better result than the former. Third method — 
Having a hammer and chisel I use them to drill a hole in the 
rock ; next I turn my attention to procuring charcoal, sulphur, 
and nitre, and mixing them in a powder, then I pour the 
powder into the hole, and the explosion that follows splits the 
stone into convenient pieces — still more of a roundabout way, 
but one which, as experience shows, is as much superior to the 
second way in result as the second was to the first. 

Yet another example. I am short-sighted, and wish to 
have a pair of spectacles. For this I require ground and 
polished glasses, and a steel framework. But all that nature 
offers towards that end is silicious earth and iron ore. How 
am I to transform these into spectacles ? Work as I may, it 
is as impossible for me to make spectacles directly out of 
silicious earth as it would be to make the steel frames out of 
iron ore. Here there is no immediate or direct method of 
production. There is nothing for it but to take the round- 
about way, and, indeed, a very roundabout way. I must take 
silicious earth and fuel, and build furnaces for smelting the 
glass from the silicious earth ; the glass thus obtained has to 
be carefully purified, worked, and cooled by a series of pro- 
cesses ; finally, the glass thus prepared — again by means of 
ingenious instruments carefully constructed beforehand — is 
ground and polished into the lens fit for short-sighted eyes. 
Similarly, I must smelt the ore in the blast furnace, change 
the raw iron into steel, and make the frame therefrom — 
processes which cannot be carried through without a long 
series of tools and buildings that, on their part again, require 
great amounts of previous labour. Thus, by an exceedingly 
roundabout way, the end is attained. 

The lesson to be drawn from all these examples alike is 
obvious. It is — that a greater result is obtained by producing 
goods in roundabout ways than by producing them directly. 
Where a good can be produced in either way, we have the 
fact that, by the indirect way, a greater product can be got 
with equal labour, or the same product with less labour. But, 
beyond this, the superiority of the indirect way manifests itself 
in being the only way in which certain goods can be obtained , 
if I might say so, it is so much the better that it is often the 
only way ! 


That roundabout methods lead to greater results than 
direct methods is one of the most important and fundamental 
propositions in the whole theory of production. It must be __\ 
emphatically stated that the only basis of this proposition 
is the experience of practical life. Economic theory does 
not and cannot show a priori that it must be so ; but the 
unanimous experience of all the technique of production says 
that it is so. And this is sufficient ; all the more that the 
facts of experience which tell us this are commonplace and 
familiar to everybody. But why is it so ? The economist 
might quite well decline to answer this question. For the 
fact that a greater product is obtained by methods of produc- 
tion that begin far back is essentially a purely technical fact, 
and to explain questions of technique does not fall within the 
economist's sphere. For instance, that tropical lands are more 
fruitful than the polar zone ; that the alloy of which coins is 
made stands more wear and tear than pure metal ; that a rail- 
road is better for transport than an ordinary turnpike road ; — 
all these are matters of fact with which the economist reckons, 
but which his science does not call on him to explain. But 
this is exactly one of those cases where, in the economist's own 
interest — the interest he has in limiting and denning his own 
task — it is exceedingly desirable to go beyond the specific 
economic sphere. If the sober physical truth is once made 
clear, political economy cannot indulge in any fancies or 
fictions about it ; and, in such questions, political economy has 
never been behind in the desire and the attempt to substitute 
its own imaginings ! Although, then, this law is already suffi- 
ciently accredited by experience, I attach particular value to 
explaining its cause, and, after what has been said as to the 
nature of production, this should not be very difficult. 

In the last resort all our productive efforts amount to 
shiftings and combinations of matter. We must know how to 
bring together the right forms of matter at the right moment, 
in order that from those associated forces the desired result, 
the product wanted, may follow. But, as we saw, the natural 
forms of matter are often so infinitely large, often so infinitely 
fine, that human hands are too weak or too coarse to control 
them. We are as powerless to overcome the cohesion of the 
wall of rock when we want building scone as we are, from 


carbon, nitrogen, hydrogen, oxygen, phosphor, potash, etc., to 
put together a single grain of wheat. But there are other 
powers which can easily do what is denied to as, and these are 
the powers of nature. There are natural powers which far 
exceed the possibilities of human power in greatness, and there 
are other natural powers in the microscopic world which can 
make combinations that put our clumsy fingers to shame. If 
we can succeed in making those forces our allies in the work 
of production, the limits of human possibility will be infinitely 
extended. And this we have done. 

The condition of our success is, that we are able to con- 
trol the materials on which the power that helps us depends, 
more easily than the materials which are to be transformed int^o 
the desired good. Happily this, condition can be very often 
complied with. Our weak yielding hand cannot overcome the 
cohesion of the rock, but the hard wedge of iron can ; the wedge 
and the hammer to drive it we can happily master with little 
trouble. We cannot gather the atoms of phosphorus and 
potash out of the ground, and the atoms of carbon and oxygen 
out of the atmospheric air, and put them together in the shape 
of the corn of wheat ; but the organic chemical powers of the 
seed can put this magical process in motion, while we on our part 
can very easily bury the seed in the place of its secret working, 
the bosom of the earth. Often, of course, we are not able 
directly to master the form of matter on which the friendly 
power depends, but in the same way as we would like it to 
help us, do we help ourselves against it ; we try to secure the 
alliance of a second natural power which brings the form of 
matter that bears the first power under our control. We wish 
to bring the well water into the house. Wooden rhones would 
force it to obey our will, and take the path we prescribe, but 
our hands have not the power to make the forest trees into 
rhones. We have not far to look, however, for an expedient. 
We ask the help of a second ally in the axe and the gouge ; 
their assistance gives us the rhones ; then the rhones bring us 
the water. And what in this illustration is done through the 
mediation of two or three members may be done, with equal 
or greater result, through five, ten, or twenty members. Just 
as we control and guide the immediate matter of which the 
good is composed by one friendly power, and that power by a 


second, so can we control and guide the second by a third, the 
third by a fourth, this, again, by a fifth, and so on, — always 
going back to more remote causes of the final result — till in 
the series we come at last to one cause which we can control 
conveniently by our own natural powers. This is the true 
importance which attaches to our entering on roundabout ways 
of production, and this is the reason of the result associated 
with them : every roundabout way means the enlisting in our - ! 
service of a power which is stronger or more cunning than the 
human hand ; every extension of the roundabout way means 
an addition to the powers which enter into the service of man, 
and the shifting of some portion of the burden of production 
from the scarce and costly labour of human beings to the 
prodigal powers of natura 

And now we may put into words an idea which has long 
waited for expression, and must certainly have occurred to the 
reader ; the kind of production which works in these wise 
circuitous methods is nothing else than what economists call 
Capitalist Production, as opposed to that production which 
goes directly at its object, as the Germans say, "mit der nachten 
Favst." 1 And Capital is nothing but the complex of intermediate! 
products which appear on the several stages of the roundabout 
journey. — ' 

It is in this way I interpret the most important funda- 
mental conception in the theory of capital, and I should be 
very glad to stop here. But, like so many another conception 
in the theory of capital, this conception of capital itself has 
become a veritable apple of discord to the theorists. A per- 
fectly amazing number of divergent interpretations here con- 
front each other, and block the approach to the theory of 
capital with one of the most vexatious controversies in which 
our science could be involved. This uncertainty as to the 
conception of capital, bad enough in itself, becomes worse in 
proportion as Capital gives modern science new questions to 
consider and discuss. It is certainly very unfortunate when a 

1 The expression Capitalist Production is generally used in one of two senses. 
It designates either a production which avails itself of the assistance of concrete 
capital (raw materials, tools, machinery, etc.), or a production carried on for 
the behoof and under the control of private capitalist undertakers. The one is 
not by any means coincident with the other. I always use the expression in 
the former of these two meanings. 


science already earnestly, even acrimoniously engaged on the 
solution of questions which affect society to its depths, — 
questions which all the world knows, ponders, and discusses as 
the great " problems of capital," — is struck, as it were, by a 
second confusion of tongues, and becomes involved in an end- 
less wrangle as to what kind of thing it is that properly is 
called Capital ! Such a controversy at such a point is more 
than embarrassing ; it is a calamity ; and has been found so in 
the history of Political Economy. Almost every year there 
appears some new attempt to settle the disputed conception, 
but, unfortunately, no authoritative result has as yet followed 
these attempts. 1 On the contrary, many of them have only 
served to put more combatants in the field and furnish more 
matter to the dispute. 

I confess that, to me, the settlement of the real problems 
connected with the name of capital seems more important, 
and certainly is more attractive, than the cataloguing of con- 
troversies as to the proper use of the word. All the same the 
fact remains that the confusion about the name has brought 
a great amount of confusion into the matter ; and, again, it 
might be open to misconstruction — and not without reason, — 
if the author of a somewhat comprehensive work on capital 
were to pass over the discussion of what is certainly the most 
noisy, if not the most weighty controversy about capital. On 
these two accounts I feel obliged again to tread the heated 
path of controversy, in the hope that impartial and sober 
inquiry into the matter in dispute may succeed in ending it. 

1 Looking back over the last few years only, I can recall, as coming in quick 
succession, the researches of Knies {Das Geld, Berlin, 1873, pp. 1-56) ; of Cossa 
{La Nozione del Capitale, 1874, published in the Saggi di Economia Politico,, 
Milan, 1878) ; of Ricca-Salerno {Sulla Teoria del Capitale, Milan, 1877) ; of 
Umpfenbach {Das Kapital in seiner Kulturbedeutung, Wiirzburg, 1879) ; of 
Kiihnast ( Ueber den rechtlichen Begriff des Kapitales in Beitrage zur Erlauterung 
des Deutschen Rechtes, 1884) ; of Supino {II Capitale nell' Organismo Economico 
e nell' Economia Politica, Milan, 1886). Meanwhile we have the well-known 
works of Rodbertus and Marx, both bearing the title Das Capital, and again the 
elaborate statements in the more comprehensive systems, particularly those of 
Wagner {Qrurtdlegung, second edition, 1879, p. 36); of Kleinwachter (Schonberg's 
Handbuch, first edition, p. 170 ; second edition, p. 206); and of Colin {Grundlegung 
der Nationalokonomie, Stuttgart, 1885, § 145-147). 



It will be most convenient to open the discussion by a his- • 
torical survey of the development of the conception. 1 

Originally the word Capital (Capitate from Caput) was used 
to signify the Principal of a money loan (Capitalis pars clebiti) 
in opposition to the Interest. This usage, already fore- 
shadowed in the Greek formation tce(f>d\aiov, became firmly 
established in mediaeval Latin, and appears to have remained 
the prevailing one for a very long time, even pretty far down 
in the new era. 2 Here, therefore, Capital meant the same 
thing as " an interest-bearing sum of money." 

In the meantime the disputes which had arfsen over the 
legitimacy or illegitimacy of loan interest brought about an 
essential deepening and widening of the conception. 3 — It had 
become apparent that the interest-bearing power of " barren " 
money was at bottom a borrowed one — borrowed from the 
productive power of things that the money could buy. Money 
only gave the exchange form — to a certain extent the out- 
ward garb — in which the interest-bearing things passed from 
hand to hand. The true " stock " or parent stem which bore 1 « 
interest was not money but the goods that were got for it. _j> 
In these circumstances the obvious course was so to change 
the conception that, besides embracing the representative 

1 See on this subject Knies, Das Geld, Berlin, 1873, p. 6 (second edition, p. 
24) ; Ricca-Salerno, Sulla Teoria del Capitate, 1877, chap. ii. ; and Schbnberg's 
ffandbuch, second edition, vol. i. p. 206. 

2 The English word " Cattle," as Knies (p. 7) has rightly remarked, has 
nothing in common derivatively with our conception. 

3 Capital and Iiittrest, book i. chaps, ii. and iii. 

chap, in TURGOT 25 

thing, money, it would embrace the represented thing goods. 
And, indeed, popular language seems to have made this change 
before science did. At least, as early as the year 1678, in a 
glossary of that year, besides the meaning of a sum of money 
there appears this further interpretation of the word capital, 
" Capitate dicitur bonum omne quod possidetur." 1 But science 
was not long behind in sanctioning the adoption of the con- 
ception. We find it substantially in Hume in his essay on 
Interest, when he shows that the rate of interest altogether 
depends, not on the amount of money, but on the amount of 
riches or stocks available ; the only thing wanting is that 
he should have formally called these riches or stocks " real 
capitals." This formal change was finally made by Turgot : 
" Whoever," he says in his Reflexions sur la Formation et la 
Distribution des Richesses, " gets possession of more goods in a 
year than he requires to use, can lay past the surplus and^ 
accumulate it. These accumulated goods are what people call 
Capital. ... It is absolutely the same whether this sum ofj 
goods, or this Capital, consists of a mass of metal, or of other 
things, since money represents every kind of goods, just as, on 
the other side, all other kinds of goods represent money." 
Thus Turgot gave the second reading in historical succession J 
to the conception of capital. 

It was very soon superseded by a third For when Turgot 
designated all saved goods indiscriminately as Capital, he 
seemed to have gone too far in broadening the conception. 
To replace the word " money " in the definition by the word 
" goods " only reflected, indeed, the more thorough grasp which 
was now taken of the subject. But to give the name of 
Capital, without any further discrimination, to stocks of 
goods, was to give up, without sufficient reason, the second 
feature in the old conception, — the reference that capital 
had to a capability of yielding interest, to an acquisition of 
goods. To that extent Turgot's conception of capital was 
only in part a development born of the time : in part It 
was an entirely new reading of the term ; a reaching 
which, at the same time, exposed him to the charge that, 
without due cause, he had neglected the very suggestive 

1 Glossarium of Dufresne du Cange, quoted by Umpfenbacb, Das Kapital in 
seiner Kulturbedeutung, Wtirzburg, 1879, p. 32. 


differences there are between goods and goods. It was no 
less a man than Adam Smith who changed and rectified - ] 
Turgot's definition. The " saved " stocks, he said, must be 
distinguished as containing two parts. 1 One portion is 
destined for immediate consumption, and gives off no kind of 
income ; the other portion is destined to bring in an income to 
its owner, and this part alone rightly bears the name of 
Capital. \ 

With this distinction, however, Adam Smith connected" 
another consideration, which was destined to have very^serious 
consequences on the development of the conception. He 
remarked that his use of the term was applicable as well 
to the case of individuals as to that of a whole community ; 
only, with this shifting of the standpoint, the group of things 
embraced by the conception was also somewhat changed. 
Individuals, that is to say, can make a gain, not only by the 
production of goods, but also by lending to other individuals 
tor a consideration goods which are destined in themselves to 
immediate consumption, such as houses, masquerade dresses, 
furniture, etc. But the community, as a whole, cannot enrich 
itself otherwise than by the production of new goods. For 
the community, then, the conception of " means of acquisi- 
tion " coincides with the otherwise narrower conception of 
" means of production." In harmony with this the conception^] 
of capital, from the point of view of the community, must be 
limited to a complex of the means of production. It is worth , 
our while to put more exactly before us the bearing of this 
insignificant remark — which, by the way, in Adam Smith is 
put more unpretentiously, and much less sharply, than in the 
abstract which I have given of his meaning. 

First of all, this w T as the beginning of the uivision of » 
capital into two independent conceptions — the conceptions 
afterwards distinguished as National Capital and Individual 
Capital. Or, to indicate the relation still more exactly, the 
parent conception of capital as a stock of goods yielding 
income lived on under the designation of "private capital," 
but, under the name of "national capital," it sent out an 
offshoot which quickly grew U independent importance. ; soon, 
indeed, to greater importance than the parent conception 

1 Wealth of Nations, book ii. chap. i. 


itself. It was immediately recognised that a very notable 
importance as regards production attached to that class of 
goods which people now began to call capital par excellence ; 
and this became the occasion of a great many profitable 
applications of the new conception to the theory of production. 
Thus we find the national conception in a short time taking 
its place as one of the chief fundamental conceptions of that 
theory, and engaged in those very important problems that 
are now associated with its name. In the triad, Land, Labour, 
and Capital, we find the new conception giving its name to one 
of the three great sources of wealth, or, as it was put later, to 
one of the three factors of production. 

But all the time, -in virtue of the old parent conception — 
that known later as Private Capital — the term capital remained 
connected with the phenomenon of interest, which belonged to 
the theory of distribution or income. Thus, from that time ] 
onward appeared the peculiar phenomenon which was to be 
the source of so many errors and complications, that two 
series of fundamentally different phenomena and fundament- 
ally different problems were treated under the same name. 
Capital, as National Capital, became the central figure of the 
weightiest problems of Production ; as Private Capital, of the 
fundamentally distinct problem of Interest. - J 

In view of this it becomes of consequence to state clearly 
that Adam Smith's two varieties of the conception of capital 
are, properly, two entirely independent conceptions, resting 
substantially on quite different foundations, and only connected 
externally by a very loose bond. As chance, however, would 
have it, it was just this secondary and external relation that 
caused the name to be given to the younger conception, and 
brought about the identity of name between the two. The iJ 
centre of gravity of the conception of private capital, as has 
been pointed out, lies in the acquisition of interest, in the 
characteristic of "being a source of income : the centre of gravity 
of the conception of national capital, on the other hand, lies 
in production, in the characteristic of being a tool of produc- 
tion ; and the loose bond that connects them is the acci- J 
dental circumstance that the goods of which men make use 
in production are the same goods as are the source of profit and 
interest to a people considered as a whole, and are, therefore, 


capital in the original sense. Now this latter reference to 
income gave the national conception of capital its name, 
but it was very far from giving it its living substance. 
This was found so exclusively in the relation to production ^ 
that, in a short time, the formal definition of capital was 
based upon that relation alone. It was defined as a complex i 
of " produced means of production," and such like, and in the 
end it scarcely caused any misgiving when, on closer considera- 
tion, the produced means of production seemed never to be 
quite identical with those stocks which constitute the income- i 
bearing capital of a people. For there can be no question that 
communities obtain income from consumption goods loaned to 
other countries against interest. When this incongruity was 
expressly noted, and yet, notwithstanding, national capital 
was quietly defined as a complex of means of production, it 
amounted to a practical and emphatic recognition of the fact 
that people were interested in capital solely on account of its~T 
relations to production, and not at all on account of its 
accidental characteristic of being the source of interest to the \ 
community. To put it shortly : in National Capital the char- 
acteristic of being the national source of interest came to the 
front only for a moment, but this moment was long enough to 
attach the name of " capital " to it. Scarcely was this done 
when the centre of gravity was shifted, and placed in its 
relation to production, and since then National Capital has 
been looked on as an independent conception, substantially 
quite foreign to its namesake, Private Capiial. 

Clearly as the historian of economic theory may now 
distinguish between these conceptions as developed, the dis- 
tinction was not seen at the time, nor for long afterwards. 
With Adam Smith himself the whole matter lies, I might say, 
in embryo. His ideas were so far from being fixed that he 
could occasionally ascribe to them meanings which were quite 
distinct from and did not at all fit in with the fundamental 
conception. An instance of this is his extension of the 
national conception to all sorts of personal properties, talents, 
skill, eta, — which seem a little out of place as elements of a 
" stock," and which, like spirits rashly conjured, banished peace 
for many a long day from the theory of capital. This, how- 
ever, is an episode of only secondary importanca The prin- 


cipal point is that the followers of Adam Smith not only failed / 
to get rid of the confusion in which he had left the conception 
of capital, but, on the contrary, positively put their seal to 
one of its worst mistakes. They did not notice that, in what 
Adam Smith and they themselves called " capital," there were 
two fundamentally distinct conceptions ; they considered the 
capital of which they spoke in the theory of production as 
identical with the capital winch bears interest. As we know, J 
Adam Smith had already noticed that there was a certain 
difference in the meanings usually given to the word capital, and 
that, for instance, rented houses, hired furniture, or masquerade 
dresses were capital in one sense and not in another, and his 
followers had not failed to loyally transmit the remark. But 
obviously they attached no importance to it, — what was the 
use of making a fuss about a distinction which referred only 
to a few hired fancy dresses and such like ? — and held fast by 
their conception of capital, the factor of production being 
capital, the source of interest. And now one confusion 
resulted in another. Before, it was the conceptions that were 
mixed ; now, it was the phenomena and the problems. Capital) 
produces, and it bears interest. What more natural than to 
say shortly ; — it bears interest because it produces. And thus, i 
introduced and made possible by the confusion in the concep- 
tion of capital, originated that naive and one-sided theory of 
the Productivity of capital which, from Say's days to our own, 
has held, and still, in some measure, holds economic science 
under its baneful influences. The Socialist or semi-socialist 
writers of our time were the first to face in earnest the con- 
fusion of conceptions by distinguishing capital into "pure 
economic capital," and capital as a " historico-legal category." l 
This distinction, as we shall see, did not indeed hit the nail 
on the head ; but it was at least a distinction which, of 
necessity, finally distinguished between the object of the pro- 
duction problem and the object of the interest problem, and 
thus paved the way for an advance in the treatment of the 
still viciously confused problems. But this is to anticipate 
the course of development : to resume the methodical narrative 
we must go back to Adam Smith. 

Jt may be said that Adam Smith's fundamental conception 
' Rodbertus, passim ; Wagner, Grundlegung, second edition, p. 39. 


was never afterwards quite neglected ; the relation of capital 
to acquisition and to production, which in opposition to Turgot 
he had again imported into the conception, has, in some form or 
other, been retained by all later writers. On the other hand, 
it very soon became manifest that, within the common funda- 
mental conception, there was a surprising amount of latitude 
for different readings of it, and, as it chanced, there were certain 
circumstances which very much favoured the taking advantage 
of this latitude. First of all, economists fell heir not only 
to the fundamental conception, but to the seed of ambiguity 
which Adam Smith had planted in it. This seed now burst 
into full life. Almost everybody, entangled in the confusion 
we have just described, thought that " Capital " must be defined 
by one, uniting conception. But the one party, and indeed 
the majority, thought more about the instruments of produc- 
tion, while the other thought more about the source of income ; 
and thus they attached to capital the characteristics of two 
different conceptions. This was one fruitful cause of divergent 
definitions, but there was another still more fruitful Whether 
the theoretical conception of capital was made to include pro- 
ductive instruments only, or whether, more liberally, it was made 
to embrace acquisitive instruments as well, in any case there 
are many different kinds both of productive and of acquisitive 
instruments. Now, in proportion as economists discovered 
more similarities or more contrasts between the various groups 
of goods which serve for production and for acquisition, 
they considered it appropriate to group together, under the 
conception which they called capital, sometimes all acquisitive 
or all productive instruments without exception, sometimes only 
a certain circle of the same. And this circle again, according 
to the tendencies of the writer, might be larger or smaller ; 
sometimes of moderate dimensions, and sometimes, again, very 
closely limited. It may be said, indeed, that of all combina- 
tions and permutations which were logically and mathematically 
conceivable, economical science in this case was not spared 

Without attempting either to give a complete tale of these, 
or to keep to the chronological order, I shall shortly collocate 
the more important of them. 

Numerous writers define capital as a group of "products 


that serve towards production," or as groups of " produced 
means of production." This conception, which is expressly 
based on the relation of capital to production, excludes, on the 
one hand, land (as not produced) and, on the other hand, all 
goods that serve for immediate satisfaction of wants. This f 
conception I have followed in defining capital as a group of 
Intermediate Products. In so far as it is not so much an \ 
alteration as a more distinct formulation of Adam Smith's 
(national) conception, I do not reckon it an independent 

The variation which Hermann, however, has given must 
be considered an independent one, and is the fourth reading in ^7 
arithmetical order given to the conception. He goes back to 
capital as the source of income, and makes this the object of 
his definition : Capital, he says, is " every durable foundation of 
a utility (Nutzung) which has exchange value." x In opposi- 
tion to the last definition this one includes under the concep- 
tion of Capital all land, and besides embraces such consump- 
tion goods as are durable, like furniture, houses, etc., even if . 
they are personally used by the owners. - > 

A fifth variation is given by Menger. He defines capital as (J 
such groups of economic goods of higher rank (productive goods) 
as are now available to us for future periods. 2 This defini- 
tion is, in one way narrower, in another, wider than Hermann's. 
It excludes durable consumption -goods ("goods of the first 
rank "), but it is wide enough to take in the productive services 
of labour, 3 which Hermann had not reckoned as capital. 

A sixth variation comes from Kleinwachter. He finds it ' 
a characteristic mark of capital that it lightens the toil of 
acquisition or productive labour. Now this characteristic 
appears to him not to belong to all means of production, but 
only to one category of these, the tools of production, while 
the matter or materials of production are absolutely passive 
during the whole production process ; they are worked up or 
used up but give no assistance in working. " Logically," J 

1 Staatswirthschaftliche UrUersuckungen, Munich, 1832, p. 59, and similarly 
in the second edition of 1874, p. 111. On p. 56 he expressly calls capital 
" Wealth which brings in income."- 

2 Grundsatze, Vienna, 1871, p. 130. 

3 See Mataja, Der Unternehmergevnnn, 1884, p. 180. 


therefore, " the conception of capital should be limited to tools 
of production." x 
\ A seventh interpretation has Jevons for its author. It 

runs parallel to a certain extent with the foregoing. That is 
to say, Jevons also considers it proved that by capital is to be 
understood " wealth employed to facilitate production." 2 But 
he finds this characteristic in quite another group of concrete 
goods from that of Klein wachter. " The single and all- 
important function of capital," he says, " is to enable the 
labourer to await the result of any long lasting work — to put 
an interval between the beginning and the end of an enter- 
prise" Capital, then, "consists merely in the aggregate of 
those commodities which are required for sustaining labourers 
of any kind or class engaged in work. A stock of food is the 
main element of capital ; but supplies of clothes, furniture, 
and all the other articles in common daily use are also 
necessary parts of capital." The true and only capital thus, 
i according to Jevons, is the sustenance of the labourers. 3 

Marx arrived at an eighth reading of the conception. As 
every one knows he sees in interest a profit got by the capitalist 
at the expense of the wage- earner. This element of exploitation 
seems to him so important that he brings it in to the concep- 
tion of capital as a constitutive feature of it : he conceives of 
capital as only those productive instruments which, in the 
hand of the capitalists, serve as " instruments for the exploita- 
tion and enslaving of the labourer." The same things in the 
\ possession of the labourer, on the other hand, are not capital. 4 

A ninth variation we owe to the distinguished critic of the 
theory of capital, Karl Knies. It originates in a well-meant 
attempt to settle the terribly tangled controversy to the satis- 
faction of everybody. To this end Knies endeavours to 
construct a conception of capital which will be so wide that 
the most important of the contending interpretations may find 
room in it beside each other. The uniting element in the. 
conception he imagines he finds in the devotion of goods to 

1 Grundlagen und Ziele des sog. xoisscnschaftlichen Sozialismus, 1885, p. 184. 

2 Theory of Political Economy, second edition, London, 1879, p. 242. 

3 Ibid. p. 242, and very emphatically p. 264 : "The capital is not the railway, 
but the food of those who made the railway." 

4 Das Kapital, vol. i., second edition, p. 796 (first edition, p. 747). See also 
Knies, Das Geld, first edition p. 53. 

chap, in KNIES, WALRAS, APLEOD 33 

the service of the future. Accordingly he defines the capital 
of a community as " its available stock of goods (whether lor 
consumption, acquisition, or production) which may be applied to 
satisfying wants in the future." l This definition does, as a fact, , 
afford room both for Turgot's " saved stocks of goods " and for' 
the " produced means of production " of Adam Smith's school, J 
as also for all goods embraced in Hermann's definition as J 
affording the foundation of a durable — and therefore a con- 
spicuously future — utility. 

Quite by itself stands the tenth interpretation, that of 
L. Walras. He divides all economic goods into " capital " and I 
" income " (revenu). All kinds of goods, irrespective of their 
destination, which can be used more than once — that is, all 
durable goods — he calls capital ; while all perishable goods are 
income. Going into details he mentions the following as_j 
capital: — Land (capitaux fonciers), persons (capitaux personnels), 
and movable durable goods {capitaux proprement dits or capitam; 
mobiliers), while he considers food, the raw materials of in- 
dustrial production, fuel and the like, as income. 2 

If the interpretations just mentioned are divided in 
opinion as to the goods which should be designated capital, 
they are, at any rate, all agreed that it is goods that are to bear 
that name. But, finally, an eleventh reading of the conception \h 
calls this in question, and, instead of making capital a real 
concrete quantity, distils out, as it were, some kind of abstrac- 
tion as the essence of capital. Thus M'Leod, who sometimes 
recurs to a favourite metaphor of earlier writers and defines 
capital as a " stock of accumulated labour," sometimes goes "I 
still deeper in abstraction and defines it as "purchasing power " 
or " circulating power." These phrases are not meant as illus-J 
trations, but explanations given in full earnest ; he gives us to 
understand this in the most emphatic way by saying, in one 
place, that the application of the word capital to goods is a 
simple metaphor, and. on another occasion, in so many words, 

1 Das Geld, first edition, p. 47. In the second edition (1885) the same concep- 
tion is on the whole retained, but often formulated in a less exact manner. 
Accordingly, where I do not explicitly mention the contrary, I quote from the 
more distinct formulation of the first edition. 

2 Aliments d'lZconomic Politique Pure, Lausanne, 1874, p. 213. Launhardt 
(Mathematische Begrundunq der Volkswirthschaftslehre, Leipsic, 1885, § 2) has 
closely followed Walras. 



that capital does not represent goods in any way whatever. 1 
Quite recently too we have a strikingly similar conception in 
the suggestive work of a juristic writer, Kiihnast. He also tells "*"[ 
us emphatically that capital is of an immaterial nature, and 
does not consist of material objects at all — of goods themselves, 
that is to say — but only of their value. " Capital is . . . the 
value of the productive power contained in material goods . . . 
or a complex of productive material values." 2 

Numerous as are these various readings of the conception, 
our list does not by any means exhaust the divisions and sub- 
divisions that might be given. In addition to the above inter- 
pretations which differ in form — which are. that is, different 
definitions — there may be complete unanimity as to the formula 
of the definition, and yet a good deal of disagreement as to the 
essence of it. This might happen where a word employed in 
all the definitions as characteristic and distinctive was not 
used in all of them in the same sense. Not to speak of less 
important instances, there are two characteristic terms which, 
as capable of different readings, involve materially different 
interpretations of the conception of capital. One of these is 
the word " good." Of the many economists who were agreed 
in defining capital as a stock or group of goods, some, taking 
the word in its narrower sense, thought only of a supply 
of material goods ; some, extending it to immaterial objects, 
thought of things like the state, peace, law, national honour, 
virtue ; 3 some again, under the same term, included useful 
personal properties and powers ; 4 while others took man 
himself into the conception. 5 A similar ambiguity has 
attended the use of the characteristic term " means of produc- 
tion," or simply " production." While some economists, and 

1 " It does not represent commodities in any way whatever, but only the power 
its owner has of purchasing what he wants " (Elements of Political Economy, 
1858, pp. 66 and 69). 

2 "Ueber den rechtlichen Begriff des Kapitals," in the Beitrdgc zur Erlmcterung 
des Deutschen Rechtes, 1884, p. 356 ; and particularly pp. 385-387. 

3 See also Knies, Das Geld, p. 17 (second edition, p. 38). 

4 Thus occasionally Adam Smith, J. B. Say, and others. 

5 Thus Canard: "The fundamental wealth of one who pursues au art or a 
Handicraft is his own person"; and later, M'Culloch (Principles of Political 
Economy, 1825, p. 319) : "A labourer is himself a part of the national capital." 
Elsewhere he explains the wage of labour as an interest on capital of the "machine 
called man." 

chap, in ROSCHER 35 

those the majority, understood by production simply a pro- 
ducing of materials for the satisfaction of human want, others 
included the producing of what they called "inward goods," 
the creation of satisfactory conditions for and in the human 
person. The consequence of this was that the significant term 
" means of production " lost every possible limitation, and that 
even goods for immediate enjoyment were received into the 
conception of capital on the ground of being instrumental in 
producing the " inward goods " of content, health, culture, etc. 
The greatest sinner in this respect is Roscher. He first defines 
capital to be " every product which is dedicated to further 
production," but then divides this general conception into 
"Productive capital" and "Use capital," according as these 
products affect the production of material goods or " the pro- 
duction of personal goods or useful relations." * Thus, notwith- 
standing the difference in definition, his conception of capital 
practically comes very near to that of Turgot. 

1 Grundlagen der Nationalokonomie, § 42. 



Political economists have not, as a rule, been noted for the 
unanimity of their definitions. But here the differences in 
the interpretation of the conception are so excessive as to 
suggest that there may be something quite peculiar about 
the object of dispute. I think Knies has quite correctly 
estimated the peculiar position of the case when he says that 
" there is something else in it than an ordinary scientific 
dispute as to whether a particular definition is happy or 
unfortunate, or, indeed, true or false." x It is not the defini- 
tion that is the matter of dispute, but the thing defined ; 
or, as I should prefer to say, the terminology. The material 
difference in the definitions is not so much that the one 
thing to be defined appears to each one in a different light, 
as that each one is defining an entirely different thing ; and 
thus definitions that are really incompatible come within the 
same ring-fence, because each one claims the expression Capital 
for the object he is defining. 

It is clear that, while this circumstance may explain the 
striking divergence of opinions, it makes it, unfortunately, more 
difficult to decide between them. For in questions of nomen- 
clature there is, strictly speaking, neither right nor wrong. 
There is, therefore, nothing to compel conviction ; there is only 
an appeal to a greater or less appropriateness ; and people 
may to a considerable extent, remain of different opinions as to 
the appropriateness. All the same it is clear that our con- 
troversy must be settled. It is impossible that economic 
science can for all time allow its representatives liberty to call 

1 Das Geld, p. 5. 


ten or eleven fundamentally different things by the same 
name. Political Economy requires clear thinking, and for that 
the prerequisites are clear ideas and clear speech. We must 
come to an agreement, and it will be come to exactly as 
men have agreed and continue to agree over the innumerable 
disputes to which the nomenclature of the descriptive natural 
sciences, zoology, botany, mineralogy, geography, continually 
gives rise. The majority unite, and slowly but surely leave 
the dissentients and pass to the order of the day. 

But on which of the numerous readings of our conception 
of capital can we hope to unite unprejudiced persons ? To my 
mind, if we have once realised the nature of the controversy 
as pre-eminently one of terminology, we shall not find it so 
difficult to decide as the amount of confusion up till now 
might lead one to suppose. Happily there cannot be much 
doubt as to certain leading principles that have to be observed 
in questions of terminology ; if these are impartially acted 
upon, the great majority of the competing definitions will be 
definitely thrown out, and there will not remain more than 
two or three between which there need be any real hesitation. 
And, even in this short leet, the arguments of appropriateness 
which must decide are so unequally distributed that, though 
we may not be able actually to force a universal acceptance of 
one definite conception — as it is, after all, only appropriate- 
ness that must guide us, — yet we may confidently look for the 
voluntary adhesion of a vast majority. 

The leading principles we have to observe seem to me to 
be as follows. First, and chiefly, it is quite clear that our 
reading of the conception must be logically unassailable ; that 
is to say, it must not contradict itself, and it must apply to 
the object which it proposes to define. Then, we must not be 
spendthrift in our terminology ; that is to say, we must not 
attach the name capital to, and make it synonymous with, a 
conception that already has a name, while other suggestive 
conceptions, to which naturally the word would equally well 
apply, have to do without any name. Thirdly, the conception 
we adopt must be scientifically important and scientifically 
useful. Lastly, and not least, unless an alteration be urgently 
demanded on some grounds of logic or appropriateness, the 
name of capital must be left to that conception for which it 


has been longest and most generally used. Or, to put it in a 
more roundabout way : as things are at present, everybody 
treats of the most weighty theoretical and social problems 
under the general name of " problems of capital " ; that being 
so, the word capital, wherever possible, should be so used as to 
spare us the aggravated difficulties that will attend the great 
controverted questions of the day if we rebaptize their terms. 

In view of these rules I would suggest the following as 
the most adequate solution of the controversy. 

Capital in general we shall call a group of Products which 
serve as means to the Acquisition of Goods. Under this 
general conception we shall put that of Social Capital as 
narrower conception. Social Capital we shall call a group of 
produots, which serve as means to the socio -economical 
Acquisition of Goods ; or, as this acquisition is only possible 
through production, we shall call it a group of products 
destined to serve towards further production ; or, briefly, a 
group of Intermediate Products. Synonymous with the wider 
of the two conceptions, the term Acquisitive Capital may be 
very suitably used, or, less suitably but more in accordance 
with usage, the term Private Capital. Social Capital again, 
the narrower of the two conceptions, may be well and concisely 
called Productive Capital. The following are my reasons for 
i this classification. 

Capital in its wider sense, and capital in its nai rower 
sense, both mark out categories which, economically, are of 
the highest importance. " Products which serve to acquisitive 
ends " possess a pre-eminent importance for the theory of 
income as being the source of interest ; while the " inter- 
mediate products " possess at least as great an importance for 
\_the theory of production. The distinction between production 
from hand to mouth and production which employs roundabout 
and fruitful methods, is so fundamental that it is eminently 
desirable that a special conception should be coined for the 
•latter. This is done— -if not, as we shall see, in the only 
possible way, yet in a way that is not inappropriate — in 
grouping together, under the conception of capital, the " inter- 
mediate products" which come into existence in the course of 
this roundabout production. 

Again, the solution suggested is the most conservative one. 


Without laying any particular weight on the fact that the 
historical origin of the word Capital l indicates a relation to 
an acquisition or a gain, and that our reading remains true to 
this, it preserves the double relation — the relation to acquisi- 
tion of interest on the one side, and to production on the 
other — which was imported into the conception of capital by 
Adam Smith, and since his time has been adopted in scientific 
usage. It is no inconsiderable advantage, then, that we do 
not require to create a majority in its favour by a revolution 
in terminology ; the majority is already with us, and the 
conception may easily be carried unanimously if we add some 
new unbiassed members. Here, too, it is worthy of particular 
attention that those writers who have occupied themselves 
professedly and most profoundly with the investigation of the 
conception of capital and its problems, have ended, almost 
without exception, by adopting exactly the same conception, or 
at least one which comes very close to it. 2 

Connected with this is the further advantage, that we avoid 
a puzzling change of name for the two classes of problems which 

1 See above, p. 24. 

2 Cossa (La Nozione del Capitale), Saggi di Ec. Pol., p. 157, has the defini- 
tion : " Capitale e un prodotto impiegato nella produzione." Ricca - Salerno 
(Sulla Teoria del Capitale, 1877, p. 51) says: "II capitale e ricchezza prodotta 
applicata alia produzione." Rodbertus, whosa opinion I am inclined to put parti- 
cularly high, because, although not altogether happy in his solution of the 
problems of capital, he had an insight into its essence such as scarcely any one 
before him had, explains (Das Kapital, p. 234, also Zur Beleuchtung der soz. 
Frage, p. 98) that "Capital (materials and tools) is product which serves for 
still further production." A. Wagner, also, who has done good service in the 
theory of capital (Grundlegung, second edition, p. 38), calls capital a "Stock of 
economical goods, which serve as instruments to the making or acquiring of new 
economical goods." In the most recent Italian monograph on capital, Supino 
(II Capitale nell' Organismo Economico e nelV Economia Politica, 1886, pp. 
9 and 17) defines capital again as "II prodotto del lavoro passato che serve a 
produzione successiva." or as "ricchezza impiegata produttivamente alio scopo 
di ricavarne un ptofitto." Of other prominent modern writers may be 
mentioned Pierson {Leerboek der Staathuishoudkunde, Haarlem, 1884, p. 157) ; 
Schonberg (Handbuch, second edition, p. 209), "Capital is a material means of 
production obtained by human labour, which, employed as such, is destined to 
give a return to its owner"; E. Sax (Grundlegung der theoretischen Staatsunrth- 
schaft, pp. 115, 315, 323, etc.) Of recent French writers on the subject Gide 
(Principes d'tconomie Politique, Paris, 1884) recognises the two varieties in the 
conception of capital with a clearness rare even in French literature, and distin- 
guishes them as "capitaux simplement lucratifs" and "capitaux productifs." 
" Les premiers," he says, "sont ceux que rapportent un revenu a une personne ; 


are both treated of now under the name of problems of capital. 
The popular name is retained both for the " factor of produc- 
tion " and for the " source of interest." And finally, it seems 
to me no small advantage that, notwithstanding the material 
difference there is between capital the factor of production, 
and capital the source of interest, it is not necessary in our 
reading of it to make two conceptions of capital that are 
entirely foreign to one another, and have nothing more in 
common than cat has with category. Our two conceptions 
have just enough in common to allow of their being formally 
coupled under one common definition, and then distinguished ' 
as narrower and wider conceptions. True, their connection is_A 
not an intimate one, and in the light of what has been said 
it cannot be so ; it rests simply on the accidental circumstance! 
that, for society as a whole, which cannot acquire except 
through producing, the goods which constitute the produced 
means of acquisition (capital in the wider sense) coincide with 
the goods which constitute the produced means of production 
(capital in the narrower sense, or Social Capital). It will be 
noted that I use the phrase Social Capital, and not the common 
expression National Capital. I do so for this reason, that, for / 
a limited community, the means of acquisition embrace not 
only productive goods but consumption goods lent to foreign 
countries. Those who hold by the conception of National 
Capital, then, must either take in the above-named consump- 
tion goods along with productive goods, thereby arriving at a 

les seconds sont ceux qui produisent une richesse nouvelle dans le pays " (p. 
148). His only failure is that he would recognise productive capitals alone as 
" true" capitals. 

In English literature our conception of capital (without, of course, any clear 
distinction being kept between its two varieties^ is almost exclusively the prevail- 
ing one ; this is so well known that I may spare quotations. Generally speaking, 
it is very significant of the state of "public opinion" in the matter that not 
long ago Kleinwachter (Schbnberg's Handbuch, second edition, p. 210) could 
explain "Common usage in political economy to-day considers it an essential 
characteristic of capital that it is a material means of production." The only 
difference of opinion is as to whether land should be reckoned as capital or not. 
Finally, I think I may venture to express the opinion that even the fore- 
most representative of a rival definition, Knies, is in opposition to us more in 
form than in matter. It is he at any rate who has, in a masterly manner, 
developed the idea — the really important one in our statement of the concep- 
tion — that, in defining capital, we must define that which is the object of those 
problems that " have appeared on the scene under the name of capital " {Das 
Geld, p. 19). 


very uninteresting conception indeed ; or if they mean to 
confine it to productive goods only, they must build their 
national conception on a quite independent basis, and break 
off all logical connection with the other conception, — which 
would at any rate be a doubtful policy. Our " Social Capital " 
avoids both these difficulties. 



And now we may review the other conceptions of capital 
already mentioned, and see if any of them can better satisfy 
scientific requirements. 

The conception which seems to me to come nearest to 
ours is that suggestive one which may be most concisely 
called the " National Subsistence Fund," and which very 
much coincides with Turgot's " Saved Stocks of Goods." This 
conception embraces all material goods with the exception 
of land. Later on we shall have to make ourselves very 
accurately acquainted with it, and to avoid repetition I refrain 
from going farther into it here. I shall only say this much. 
The conception of the national subsistence fund is, like our 
own, a conception of great scientific suggestiveness, and is so 
as regards those very problems which connect themselves with 
the word capital. In particular, as being so much in touch 
with the phenomenon of capitalist production (production 
carried on in lengthy processes and roundabout methods), it is 
even more happy than our conception of the Intermediate') 
Products. The latter, indeed, embraces all those goods which 
come into existence during the production process, the goods 
which carry it on and help to complete it; but it does 
not embrace the initial fund of consumption goods needed 
to commence the process. It therefore leaves out the first 
link in the chain, which is a very important one, while 
the conception of the Subsistence Fund, as I understand it, 
embraces the entire group of goods by means of which the i 
capitalist process is begun and carried through. 

Notwithstanding the importance of this conception in the 


theory of capital, I put it second to the other for the following 
reasons. First, on account of the difficulty of sharply dividing 
between those funds of subsistence which serve for acquisition 
and production, and those which stand outside of any relation 
to acquisition and consequently have nothing at all to do 
with the scientific problem of capital. 1 Second, that in any case 
the conception of " intermediate products " is so conspicuously 
important, that it is scarcely less worthy of being indicated 
and emphasised by the name of capital, than is the conception 
of the " national subsistence fund." Third, that, as compared 
with the latter, the "intermediate products" appear to me to 
have in their favour the distinct and also the decisive advan- 
tage of being already familiar expressions. Capital, the factor 
of production, cannot again be left without a name, and for 
that reason the conception of " national subsistence fund " 
must come second. 

Next in importance comes Eoscher's conception. It is due 
as much to the high scientific position of this writer as to the 
widely spread acceptance of his doctrine that we should go more 
fully into the definition he gives of capital. Unfortunately, I am 
bound to say that it seems to me anything but happy. In the 
form of it Roscher appears to come very near to the same concep- 
tion as lies at the basis of our definition, in claiming the designa- 
tion capital for " every product saved for further production." 2 
But in the very next lines, when enumerating the elements of 
a community's capital, he veers round to Turgot's conception, 
and includes dwelling-houses, " utensils of personal service," 

1 I do not care to waste more words than necessary here on things which will 
become clear of themselves as we go on, but I may make one remark. For reasons J' 
that Rodbertus (Das Kapital, p. 301) has seen through tolerably correctly, and 
which will be fully explained later, it is by no means my meaning to emphasise 
only the subsistence advanced to productive labourers, and reckon it capital. 
Either the conception of capital is limited to goods which serve immediately in - 1 
production, and therefore to productive goods proper, — in which case means of 
subsistence in general, and also the means of subsistence of labourers, have noj 
share. Or, besides "intermediate products," such finished consumption goods 
are taken into the conception as serve indirectly by their existence to produc- 
tion, — in which case, as will be shown in the proper place, certain advances of 
subsistence given to landowners and capitalists must be included. But then we 
are at once met with the difficulty suggested in the text of fixing definitely, when 
the advances of subsistence, given to people who do not themselves produce, are 
of indirect assistance to production, and when they occupy no relation to it. 

2 Grvndlagen der Nationalokonomie, § 42. 


and, in short, goods for immediate consumption. This vacilla- 
tion is due to the fact that Eoscher gives an unusually wide 
interpretation to the conception of " product " and " means of 
production." He looks upon every satisfaction of a real want 
as the production of a " personal good," i and this causes him 
to recognise everything that serves to the satisfaction of 
human want (that is, simply, all goods) as means of production. 
Any unbiassed person can see how unfortunate this is. With- 
out due cause it obliterates the very important opposition that 
exists between the production of goods which satisfy want, and 
their consumption. It christens, for example, the idler as a 
zealous producer, always thinking how he may produce the 
personal goods of satiety, of ease, of contentment, and so on. 
It leads, moreover, to a lamentable waste of terminology. 
When the conception " means of production " is made synony^ 
mous with the conception " good," there is no name left for 
the true instrument of production But the latter, as a highly 
important economic category, must be kept prominent and 
distinct from goods for immediate consumption, and so we fall 
from one confusion and ambiguity of terminology into another 
This shows itself most significantly in Roscher's own conception. 
He feels the very sensible need of distinguishing, inside his 
conception of capital, those goods which serve to the produc- 
tion of " material goods " from those other goods which serve 
simply to the production of " personal goods," and he does this 
by designating the former as "productive capitals" and the 
latter as " use-capitals." This expression is doubly unfortunate. 
First, in putting " use-capitals " in opposition to " productive 
capitals," the capacity of being means of production is im- 
plicitly refused to " use-capitals " ; while they found admittance 
to the conception of capital only on the ground of this very 
capacity, viz. as "products saved for further production." 
And second, the same word " productive" is made to serve in 
the one breath as the predicate which binds together all 
capitals, and as the predicate which divides capital into two. 
Could any terminology be more unfortunate ? 2 

But Roscher's definition of capital is not only inappro- 
priate ; it is, in my opinion, logically unsound, inasmuch as it 

1 Grundlagen dcr Nationalokonomie, § 211. 
2 See also the acute criticism of Knies, Das Geld, p. 46. 


does not cover those things which Roscher means it to define. 
After he has christened all goods productive instruments, it 
might be thought that he would consider the totality of goods as 
capital, with the exception of land. The definition of " products 
saved for further production " — if the production of personal 
goods be included — seems to apply to them all. That, how- 
ever, is not Roscher's meaning. From his enumeration of the 
elements of a community's capital, as well as from an expression 
used in § 43, where he puts the use-capital in opposition to 
objects of use which are not capital, it follows that, of con- 
sumption goods he will reckon as capital only those which are 
durable, such as houses, furniture, etc., and not those which 
are perishable (with the exception of the means of subsistence 
of productive labourers). He justifies this by saying : — " On 
the other hand, the sharp line of division between the Use- 
Capital and those objects of consumption which are not capital 
rests, in conformity with our definition of capital, on the fact 
that the latter are not only more speedily consumed, but are 
always meant to be consumed ; whereas, in the case of the 
former, the consumption is only the inevitable and the reverse 
side of the use." These words cannot very well mean any- 
thing but that the speedy intentional consumption of goods 
is the direct opposite of "saving," so that one characteristic 
demanded by Roscher's definition is not present in perishable 
consumption goods. Suppose this granted, is the same defect 
not inherent in the perishable raw materials and auxiliary 
materials of production as in the means of subsistence of the 
productive labourers, which Roscher has expressly enumer- 
ated among the elements of the community's capital? Is 
not "the coal at the forge," the "gunpowder in the chase 
and in blasting operations," the bread in the worker's mouth, 

quickly and intentionally consumed? It is either, or ! 

Either speedy and intentional consumption is the opposite 
of " saving," and takes away from such goods the property of 
being capital, in which case Roscher must also exclude the 
perishable raw and auxiliary materials, of production and the 
maintenance of the producers ; or speedy consumption is not 
a ground of exclusion from the conception of capital, in whioh 
case the perishable means of " production of personal goods '' 
cannot be refused admittance to the conception. Roscher's 


definition therefore fits either a wider or a narrower circle of 
things, but never exactly that circle which he meant to define 
as capital. 1 

The conception of capital most closely allied to this — in 
so far as it also enumerates consumption goods along with 
acquisitive instruments — is that laid down by Knies. It is 
based on an idea which, from the point of theory, is as inter- 
esting as it is important. All the same, I think that, on closer 
examination, it will not be preferred to ours. 

Knies defines as capital " that complex of goods available 
to a community which may be applied to the satisfaction of 
want in the future." This definition, as we can easily see, 
agrees almost word for word with that of another conspicuously 
important and fundamental conception. If we leave out the 
words " in the future," it takes in all the goods in a community 
available for the satisfaction of want, and that is an amount 
which most writers are in the habit of calling the " wealth " 
(Vermogen) of the community. If, like Knies, 2 we emphasise 
the fact that wealth embraces only the net amount of goods 
after deduction of debts, we may perhaps call that amount the 
community's " gross property " 3 {Guterhesitz). In any case 
we have in this to deal with an independent amount bearing 
an independent name, with which " capital " neither coincides 
nor should coincide. 

Now from this amount Knies would distinguish his con- 
ception of capital by adding the words " in the future." Do 
these words really convey a distinction ? In my opinion they 
do not ; at least, if we strictly give them the meaning they 
naturally have. It is an attribute of all wealth without 
exception that it is used for the satisfaction of wants in the 
future. All accumulation of wealth is based on provision for 

1 In latest editions Roscher, evidently under the influence of what Knies 
has said on the subject, formally widens his definition of capital to some extent 
by an addition. It now runs: " Every product which is destined to further 
economical production (even to systematic later use) we call capital." This 
addition, however, does not materially widen the conception, as Roscher, inde- 
pendent of this, has already included every use — therefore every "systematic 
later use " — in the production of (material or personal) goods. 

2 Das Geld, pp. 83 and 92. 

8 For the community as a whole, moreover, which, naturally, has neither 
claims nor debts, its material property, according to Knies's definition, completely 
coincides with its wealth. 


future requirements. Every atom of wealth in my possession 
at this moment has been acquired at a previous point of time 
with the view of being spent at a future point of time. 
That point of time may not be far away ; it may, perhaps, be 
the next day, or the next hour ; but certainly it is still in the 
future. If, therefore, we take .the word " future " in its strict 
sense, Knies's formula has obviously defined not only Capital 
but Wealth ; and his conception of capital coincides with the 
ordinary conception of wealth. 

If Knies had actually contemplated this, it would not be 
difficult to pronounce upon his conception of capital. "We 
should have to accuse him of waste of terminology. It would 
evidently be a highly inappropriate duplication of terms to 
use the word capital as a synonymous expression for the 
familiar conception which already bears the name of wealth, 
while other weighty conceptions — as, for instance, certain 
groups of acquisitive instruments — have no name. 1 But 
Knies had no thought of any such identification. Indeed, he 
repeatedly and emphatically says that his conception embraces 
only a part of the total possession of goods, and he opposes to 
it, as the second member of his division, those goods that serve 
for the satisfaction of "current present want." This classification 
obviously assumes that the word " present " is not to be taken 
altogether literally. For if by the " present " were to be 
understood strictly that point of time which divides the past 
from the future, the goods which entered into employment in 
that moment of time would, of course, represent so insignificant 
an amount that it would not be worth while to speak of them, 
to say nothing of basing a scientific classification and a. new 
conception on their short lease of life. If the second member 
of Knies's classification is to be anything at all, the " present " 
must be extended from a point of time to a period of time, 
and this, naturally, can only be done at the expense of the 
future. By the " present " we must understand a period of 
time which goes beyond the narrow limits of the fleeting 
moment, and takes in some part, large or small, of the im- 
mediate or near future. 

Now, while it would be pedantic to say that such a 

1 Knies himself has pronounced this opinion in saying {Das G-eld, p. 22) that 
no one would claim that " capital is identical with economic goods." 


deviation from strict literal exactness is inadmissible, it seems 
to me unfortunate if a scientific conception can only hold its 
own by allowing its most important, indeed its only character- 
istic feature, to be used in a loose sense ; all the more so that 
Knies, in order to guard his conception of capital from merging 
into that of wealth, should have made the distinction between 
present and future into a sharp opposition. It is not too 
much to say that his conception of capital lives by the opposi- 
tion between present and future, and this opposition must lose 
its strength whenever, and so far as, goods devoted to the 
service of a near future, but all the same a future, find their 
place not on the side of capital devoted to the future, but on 
the other ! 

But to look further : if we add a portion of the future to 
the present, how far is this addition to go ? Is it to be the 
next hour, or the next day, or is it to be a longer period — say 
the current month or the economic year ? This seems to me 
rather an important point to determine, but Knies himself has 
not said anything about it. If, in his place, we consider the 
different possibilities, it is easy to see that the addition of a 
short period, an hour or a day, does not secure the end con- 
templated. The amount of goods that a people consumes in a 
day is 3 ^ of its income, and is a much smaller fraction of its 
wealth. Now, very few people would think it appropriate to 
separate off a thousandth part from the total amount of goods 
which form the total wealth of a community in order to put 
the remaining ffio^ together under one independent conception 
— particularly when that thousandth part is not divided off 
from the principal sum by a clear and well-marked opposition, 
but only by a conventional and somewhat metaphorical reading 
of the word " present." To put it shortly : a conception of 
capital which embraces roughly ^nro of the conception of 
wealth comes too close to the conception of wealth to have 
any scientific significance. 

But if we add a longer period of time, say a month, we 
encounter new difficulties. Owing to this altered reading we 
shall now deduct from the conception of capital all goods that 
are destined to be consumed in the ordinary purposes of life 
during the current month. Good. But it is possible that I 
may make a profit out of these very goods previous to their 

chap, v KATIES 49 

consumption and without prejudice to it. For instance, a 
sum of money which I intend to dispose of finally on the 
fifteenth of the current month, I may lodge with a bank 
as an interest-bearing deposit from the first to the fifteenth, 
against a deposit receipt, or I may put it into open account. 
What then ? Does this interest -bearing money belong to 
capital or does it not ? Whatever the answer, we do not 
avoid serious difficulties. If we answer it in the affirmative, 
we lay ourselves open to the charge of being illogical ; for, by 
hypothesis, the whole of the current month is a widened 
present. But if we answer it in the negative, we first put 
ourselves in a position of flagrant contradiction with firmly - 
established usage ; then we commit ourselves to the strange 
doctrine that a thing which undoubtedly bears interest is not 
capital ; and, finally, we give up what formed the strongest 
recommendation of Knies's conception — its purpose of recon- 
ciliation. This conception of capital has been put forward by 
Knies with the express intention of uniting under it, as a 
higher and broader unity, all former and competing conceptions. 
In it Turgot's " stocks of goods," and Adam Smith's " complex 
of acquisitive instruments," and Hermann's " goods of durable 
use" were to find ample room beside each other. But this 
mission of reconciliation, and with it the raison d'itre of 
Knies's theory, disappears the moment that any one acquisitive 
instrument is denied recognition as capital — especially interest- 
bearing money, the first parent of the conception. 1 

In. whatever way, then, it is looked at, we get no clear 
satisfaction from Knies's conception. But, to be just to Knies, 
I must recognise emphatically that there is a deep and signifi- 
cant idea at the root of it, and that if his conception fails of 
its end it is only because of external defects, or, if I might say 
so, defects that belong to the technique of conception. As a 
fact their destination to the service of the future is a peculiarly 
important characteristic of the goods we call capital, indeed, a 
characteristic which gives us the key to the most important 
problems connected with the subject. Only it is not exactly 
the distinguishing characteristic, but one that capital shares 

1 It needs no showing that the group of short-dated money claims, although 
the most obvious, is by no means the only example that might be given in pvoof 
of the objection urged in the text. 



with several other classes of goods which we have good reasons 
for not reckoning as capital ; and for that reason — but only 
for that reason — it is not fitted to act as the constitutive and 
distinctive feature on which to base our definition. 1 

The conceptions of capital hitherto mentioned are dis- 
tinguished, as a whole, from our conception in that they include 
consumption goods as well as acquisitive instruments. We 
come now to certain conceptions that agree with ours in 
reserving the name of capital for a complex of acquisitive 
instruments, but differ from it, and from each other, as to 
what this complex includes. 

The widest of these would simply include under capital all 
acquisitive instruments — not only material but personal. 
Under different names it counts labour as capital. Many 
conceive of the work of the labourer as capital ; others, of his 
labour power ; 2 others, again, of the entire person of the labourer? 
In itself of course there is nothing in the world to prevent the 
totality of things which serve in acquisition from being 
grouped together under one uniting conception, and called by 
one common name. This has already been done substantially 
in the conception and under the title of " acquisitive instru- 
ments," or "productive goods," or "goods of higher rank." 
But it is an entirely different question whether one is justified 
in claiming the name of " capital " for such a conception. I 
should say with all possible emphasis that one is not. First 
of all, if the title is given to the totality of all acquisitive 
instruments, it can only be at the cost of refusing it to any 
narrower group of acquisitive instruments which likewise 
claims it. Now the former conception is already sufficiently 
known by the above-mentioned names, while the narrower and 

1 Among others Ricca- Salerno (Sulla Teoria del Capitale, Milan, 1877, p. 58) 
and lately Emil Sax (Gfrundlegung der theoretischen Staatsivirthschaft, p. 310) 
have criticised Knies on this point. Sax's criticism of the weaknesses of Knies's 
conception is both trenchant and substantially correct, but he does not recognise 
the kernel of truth that is in it, and ends by a judgment which, on the whole, is 
rather rudely expressed. 

2 For instance, Adam Smith, ii. 1 ; Umpfenbach, Das Kapital in seiner Kul- 
lurbedeutung, 1879, p. 19 ; Say, Coure Complet, part i. chap. x. 

3 Thus Say, Coars Complet, part i. chap. xiii. ; M'Culloch, Principles, first 
edition, p. 319 ; fifth edition, p. 294 ; Walras, fiUments d' ficonomie Politique, 
p. 217. 


rival conception is very important and has no other name but 
capital. Even were the question, then, in other respects an 
entirely open one, we should, on the ground of economy of 
terms, decide against the use of the word capital for the totality 
of acquisitive instruments. But it is not an open question ; it 
is already prejudiced by universal usage. In political economy 
and in practical life generally we have long been accustomed 
to treat of certain great social problems as problems of capital, 
and in doing so we have had in our minds, not a conception 
which embraced labour, but a conception that opposed capital 
to labour. Capital and Labour, Oapitalis-m and Socialism, 
Interest on capital and Wages of labour, are certainly not 
harmless synonyms ; they express the strongest conceivable 
social and economical contrasts. 

Now what would be the consequence if people began all at 
once to call labour capital ? In the most favourable circum- 
stances it would be an innovation in terminology with little to 
recommend it. If all the world were to adapt itself to the 
innovation, and were to do so in full consciousness that it was 
an innovation in terminology and nothing more, it might 
remain perfectly clear that, in putting under one common 
name the real differences that separate labour from what 
has hitherto been called capital, these differences are not in 
the least reconciled. As before, everybody would notice these 
differences, and work without bias at the social problems to 
which they give rise. Economic theory would not then suffer 
any material injury be}'ond the inconvenience of having no 
name for the chief object of such inquiries ; for, of course, 
from the moment that labour is reckoned capital we must 
cease to give the name of capital to its social opposite. 

This, I say, might be the result in the most favourable 
circumstances; unfortunately such a result is most unlikely. 
It is much more probable that the blending of the names 
would bring confusion into the matter. We need not deceive 
ourselves on this point ; names and catchwords always exert an 
immense influence over us. Most of us are very fond of slurring 
over inconvenient contradictions and smoothing down thorny 
problems. How could one resist the tempting opportunity 
which the new meaning of the word capital would offer ? 
Between Capital and Labour, as these words were used 


formerly, there was discord, contrast, conflict. Now one single 
happy word unites all contrasts ; what we thought opposites 
are really homogeneous ; labour is capital ; wage and interest 
are at bottom one ! 

The reader will perhaps think it a mere jest to put such 
words in the mouth of serious thinkers. Economic literature, 
unfortunately, witnesses to the earnest of it, as we see in the 
case of those writers who conceived the unlucky idea of 
rebaptizing labour as capital. There is first M'Culloch. He 
represents the labourer as a piece of fixed capital, as a kind 
of machine. When he has thus torn down the partition 
wall between capital and labour he immediately goes on to 
the logical conclusion, and abolishes the distinction between 
Interest and Wage. To him they are homogeneous ; but — 
and it is as significant as it is ridiculous — he does not very 
well know whether he should explain interest by wage, or 
wage by interest. He gets out of the difficulty by explaining 
each by the other. He first sets forth, at great length, how 
interest is essentially nothing else than the wage for " previ- 
ously accumulated labour," and then he tries to make the 
nature of wage clearer by explaining it as a profit of capital — 
" the common and ordinary rate of profit on his capital, 
exclusive of a sum to replace its wear and tear, earned by the 
machine called man." l It does not seem to have occurred to 
him that a see-saw like this does not really explain either of 
the phenomena. 

M'Culloch's ill-digested doctrines have nearly fallen into 
well-deserved oblivion. But if I am not mistaken, we are 
threatened with a resurrection of them in changed form. 
Quite lately we have had a number of views, closely related to 
the foregoing, put forward with that suddenness and abundance 
which is at all times a sign that the idea is, so to speak, in 
the air, and promises to be fashionable. We are told almost 
simultaneously, and in almost the same words, by Weiss, by 
Dargun, and by Ofner, that every labourer represents a capital 
equal to the cost of his upbringing — say, a thousand thalers 
for the unskilled, or three thousand thalers for the skilled 
labourer. Or, on another method of valuation, we are taught 
that the labourer is equal to the capitalised net return of his 
1 See my Capital and Interest, p. 99. 


year's labour. His wage, therefore, is peculiarly a kind of hire 
of capital, and must, like every other hire, contain at least the 
three following elements : (1) The replacement of the cost of 
necessary upkeep of the human machine, calculated at the 
minimum of existence ; (2) a quota for amortisation, in pre- 
miums of assurance against old age; and (3) a net interest 
calculated on the capital value of the human machine at the 
ordinary interest rate. 1 

All honour to the motives which have given rise to this 
theory. It is devised in the interests of the poor, and for 
the reconciliation of all classes. Between the iron law of 
wages which takes away all hope from the worker of earning 
anything but bare necessaries, and the socialist theory which 
promises the labourers everything, and the propertied classes 
nothing, it steers a middle course; it leaves the owner of 
material capital his hard contested interest, but would have him 
share it with the owner of personal capital. Thus the joint 
capitalism of the worker becomes on this theory the magic 
formula that is to be followed by the golden fruits of recon- 
ciliation and humanity. The pity is that it is only a formula ; a 
parade of words with no soul of truth in it. Very few people 
would deny that, in certain points, there is a real analogy between 
a worker, the cost of whose education and training in produc- 
tion has been advanced to him, and a piece of capital. But 
how deep does this analogy go ? On occasions when we wish to 
make use of it in making comparisons that are really instructive, 
or when nothing depends on scientific exactitude, the analogy 
goes deep enough to permit of using a figure of speech and 
calling the labourer a "capital," just as capital also is often spoken 
of figuratively as " previous labour " or " stored-up labour." But 
the analogy does not hold right through, and in particular it 
fails as regards wage and interest. That capital yields a profit or 
gain, rests on a quite peculiar ground — a ground that does not 
obtain in the case of labour, or does so very exceptionally. I 
hope to establish this with perfect clearness when we come to 

1 Fr. Albert Maria Weiss, Ord. -Priester, Die Gesetze der Berechnung von 
Kapitalzins und Arbeitslohn, Freiburg, 1883. Quoted by Schaffie in Tubinger 
Zeitschrift, vol. xli. p. 225. Dargun, Arbeitskapital und Normakrwcrb, 
Tiibinger Zeitschrift, vol. xl. p. 514, and specially pp. 530-535. Ofner, Ueber 
das Rechtsprincip des Arbeiisiohnes nach herrschendem System, Juristische Blatter, 
1884, Nos. 3 and i. Engel, Der Werth des Menschcn, 1883. 


the theory of interest, but this much 1 may say meantime, — 
that a man must have curiously shifted his point of view if 
he thinks to make the essential nature of wage more intelligible 
by supporting it on the phenomenon of interest. Of the two 
phenomena, that of wage is by far the more simple and self- 
explanatory. One man gives the valuable good called labour, ( 
and another man gives him a price for it. Anything simpler 
cannot well be imagined. But the fact that capital yields 
an interes is much less easy to understand. Witness the 
many theories we had to discuss in Capital and Interest, 
none of which were ever able to state satisfactorily the 
essence of that phenomenon. To think of explaining the 
simple facts of wage by reading into them the much more 
involved and obscure facts of interest, is really to explain the 
church by the steeple. Moreover, the value of these forced 
interpretations receives a vivic 1 illustration in the fact that, 
as we have seen, numerous writers are at the same time striving 
to get at a better understanding of the nature of interest by 
expounding it as a peculiar kind of wage. Where then the 
one sees the riddle, the other sees the solution. What an 
amount of vagueness as to the nature of the problems waiting Uv 1 
solution is involuntarily betrayed in all this. 1 (T 

To sum up. The inclusion of labour in the conception of I 
capital would be, in the most favourable circumstances, inap- 
propriate ; in the more unfavourable, which unfortunately havej 
been the real circumstances, it has been pernicious, calculated 
to perpetuate the confusion of terminology, to open door after 
door to false analogies, and to obscure and prevent clearness of 
thought in those very questions which are at once the most 
difficult and the most important in the social science of to-day. 
We shall therefore decide very emphatically and, I hope, ) 
unanimously, to exclude personal means of acquisition from 
the conception of Capital. 2 

1 It is very significant that none of the authors who explain wage by interest 
makes any attempt to explain interest itself. They simply accept it as a given 
fact — with the exception of M'Culloch, who, with amazing naivete, repeats the 
trick again in the opposite way, and explains interest by wage. It is very 
gratifying to me to note that Schaffle holds himself aloof from the theories just 
criticised, although his social and political tendencies must certainly lie in their 
direction (Tiibinger Zeitschrift, vol. xli. p. 225). 

2 See also Schmoller, whose conclusions agree with mine (Lehre vom Ein- 


The next stage of the controversy brings us to the question 
whether we are to give the name of capital only to the 
products of labour that serve for acquisition, the " previous 
stored up labour," or are to include land. Both views claim for 
the name of capital a really important and fruitful conception. 
As contrasted with labour, land has so much in common with - ] 
the " produced " acquisitive instruments of material nature 
that a union of them under one conception has good justifica- 
tion. So, too, the income which flows from the two kinds of 
acquisitive instruments has, in many essential respects, the 
same nature, and this likewise favours the uniting of them in J 
one conception. On the other hand, in many essential respects 7 
land and capital take different ways. The former is immovable; . 
the latter, for the most part, movable. The former is a gift of 
nature ; the latter, a result of labour. The former cannot be 
increased, the latter can be. The landowner has a social 
and economical position essentially different from that of 
the capitalist; property in land is justified on essentially 
different grounds from property in movables. Land is the 
special object of a kind of production which is economically , 
distinguished by many important peculiarities. Income from"! 
land, while subject to many laws in common with income 
from capital, obeys many distinct laws of its own — land rent, 
for instance, rising with economical development, while interest 
falls. On all these considerations, the number of which might 
easily be increased, 1 it is most convenient to keep land quite 
distinct from the other kinds of productive wealth. J 

kommen in ihrem Zusammenhang mit den Grundprincipien der Steuerlehre, 
Tiibinger Zeitschrift, 1863, p. 24) ; Knies, Das Geld, pp. 15-22 ; Ricca-Salerao, as 
before, p. 28 ; and Cossa, La Nozione del Capitale, in th<^ Saggi di Ec. Pol., 1878, 
p. 163. What Cossa says against the passion for immoderately widening the con- 
ception of capital is well worth noting. He is remarking that one very often feels 
the want of an expression which would indicate without ambiguity just those 
products which serve immediately for production, and he continues: — "Se il 
concetto del capitale si allarga di troppo, comprendendovi altri prodotti, o altri 
fattori della produzione, esso o sfuma del tutto, o non ha piu la sua ragione di 
essere. Si contruisce, per dir la cosa in altro modo, uno strumento od imperfetto 
o superfluo, il quale o non serve pun to, o non serve bene. E tali categorie 
debbonsi senz' altro espellere, e nongia moltiplicare nelleinvestigazionieconomiche, 
se non vogliamo che la scienza si isterilisca in polemiche oziose a puramente nom- 

inali," p. 168. 

1 See Knies, Das Geld, p. 33 ; Schonberg, ffandbuch, second edition, vol. i. 
p. 210; Roscher, Grundlagen, §42, note 1. 


Thus the two competing conceptions are fairly well 
balanced in importance and suggestiveness, and if these pro- 
perties were the only things to look to in deciding our con- 
troversy the decision might really be left very much to indi- 
vidual choice. If, however, we go on to compare the two 
in the light of the other rules we have laid down as regulat- 
ing appropriate terminology, we find several points in which 
the " complex of produced acquisitive instruments " has a 
definite advantage over its competitor. The first is that of 
economy of terms. If we apply the word capital to all the 
material means of acquisition, then the narrower of the com- 
peting conceptions, and the branch of income that corresponds 
to it, remain, notwithstanding their importance, without any 
name at all. When we have disposed of the words capital and 
rent of capital otherwise, we have no correspondingly simple 
name, either for the group of produced acquisitive instruments, 
or for the income that comes from them. On the other hand, ( 
we avoid any such confusion of terminology by giving the 
name capital to the produced acquisitive instruments. The ^\ 
totality of all material acquisitive instruments may then, well 
and simply, be called " acquisitive wealth," and all income 
flowing from it may, on Rodbertus's precedent, be called Eent 
with its convenient subdivisions of land rent and capital rent. 

The limitation of capital to " produced means of acquisPVf 
tion " has another advantage in being in accord with popular 
usage. Both scientific and popular language tell us unmis- 
takably that they do not put land under capital, but oppose the 
two. The genius of our language plainly distinguishes between 
landowner and capitalist. No one will say that a nation 
that has an abundance of fruitful soil is possessed of great 
capital on that account. The name of interest is never applied 
by people generally to the income from land, and in scientific 
literature it is so applied only by an insignificant minority. 
And in the discussion of the great social problems, property in 
land and property in capital are generally attacked and 
defended by quite distinct people and by quite distinct 
methods. If we sum up all that has been said, the conclusion! 
seems to be that while, for reasons repeatedly given, there can 
be no idea of an absolutely convincing argument, there is still 
a considerable balance in favour of defining capital as the 


" produced means of acquisition," and against the inclusion of 

Finally, such conceptions as would limit capital still more 
severely, may, I think, be easily and decidedly refuted. 
Kleinwachter would distinguish between the materials and the 
tools of production, and reckon only the latter as capital, on 
the ground that in production it is only the tools that actively 
co-operate and assist us, the materials of production being 
purely passive. 1 But this assumption is not correct. The 
function of materials of production is not simply to serve as 
a "dead and plastic mass"; by means of the natural powers 
residing in them these materials take a share in the work of 
production which is, indeed, less prominent, but is, essentially, 
no less active. Kleinwachter's view is, by his own confession, 
incorrect from the point of physical science, 2 and as we have 
here to do with a question of productive technique, where 
political economy must take its stand on natural science, it is 
incorrect from the point of economics. 

Marx, again, would confine the conception of capital to 
those productive instruments which are to be found in the 
hands of persons other than the labourers themselves, and are 
used to exploit the labourers. With him, therefore, capital is 
the same thing as " means of exploitation." This distinction 
would be quite an important and suggestive one if the 
Exploitation theory itself were correct. But since, as has 
been shown in my former work, 3 it is not, the justification of 
the distinction based on that theory falls with it. 

Jevons's notion of capital is that of " the aggregate of those 
commodities which are required for sustaining labourers of any 
kind or class engaged in work"; "the wages of labour either 
in its transitory form of money, or its real form of food and 
other necessaries of life." 4 If this were correct, every land 
would be rich in capital in proportion as its wages were high 
and its means of subsistence cheap. An African tribe that 
has neither industry, nor machinery, nor factories, nor railways, 
but lives under a tropical sun, where the necessaries of life are 

1 Die Grundlagen und Ziele des sog. wissenschaftlichen Sozialismus, Innsbruck, 
1885, p. 185. 

2 "In the strict physical sense, of course, this is not correct" (p. 192). 

3 Capital and Interest, book vi. p. 313. 

4 Theory of Political Economy, second edition, pp. 242. 263. 



poured forth without stint, would be the richest hi capital ! 
Obviously, of course, the idea that Jevons had in his mind 
was a perfectly correct one, but the expression he gave it was 
unfortunate. He confused a condition of the formation of 
capital with capital itself. The way of capitalist production is 
long and roundabout, and man cannot enter upon it unless he 
is provided with the means of subsistence for the time that 
must intervene before he reaps the return. But it is not the 
means of subsistence, and, in particular, it is not the means of 
subsistence alone, that constitutes capital. Capital only comest 
into existence when man actually enters upon the profitable 
roundabout journey that the means of subsistence have made 
possible ; when he builds machines, tools, railways, factories, 
raises raw materials, and so on. However abundant thej 
means of subsistence were, if the workers were to consume 
them in living from hand to mouth, the community would 
evidently never accumulate capital at all. 

Finally, there remain those conceptions which see in 
capital not a complex of goods, but an abstract quantity 
hovering over goods, as it were ; as, for instance, Kuhnast's 
" sum of value," or M'Leod's " circulating power." I have, 
generally speaking, a very poor opinion of such idealisations 
of economic conceptions. They are usually cheap expedients 
for getting round difficulties. If in any difficult subject there 
occurs some troublesome, angular kind of conception that 
corresponds with real life and will not fit in to the particular 
line of explanation, there are always certain theorists ready to 
disembody it, whereby, of course, it loses its unmannerly 
angles and edges, but, at the same time, its strength and 
truth. It becomes a phrase and leads to phrases. We have 
an instance of this here. If we were to take the sponsors 
of those definitions at their word, and ask them whether they 
would seriously say that an immaterial sum of value or 
circulating power can grind corn, or spin yarn, or plough up 
land, or carry a load ; or whether it is not the case that these 
good things are done by the common material goods called 
mills, looms, ploughs, locomotives, they would be very much 
perplexed. For, asking at their own consciousness, they could 
scarcely deny that, under the name capital, they have always 
and peculiarly thought of that something which helps man to 


work in his production; and the rude materiality of this some- 
thing agrees but ill with the high-sounding abstract definition 
of " sum of value " or " circulating power." It is very signifi- 
cant, as regards this group of definitions of capital, that their 
origin may be traced to a slipshod expression of a writer who 
was always too careless about the way in which he stated his 
conceptions — J. B. Say. Say first — and quite correctly — 
gives the name of capital to certain results of labour that 
serve as tools to further production, such as Seed, Dye-stuffs, 
Wool, Tools, Machines, Buildings, Cattle, etc., and calls their 
total value Capital Valua Later on he makes the remark 
that a capital value may take very different forms, such as 
money, houses, utensils, commodities, etc., and this gives him 
occasion to call " this value a capital, so soon as it is contained 
in objects, whatever they be, which are destined to productive 
activity." J Evidently a careless and contradictory expression, 
which, however, his economical disciples made the basis of a 
serious theory ! 2 

Thus, of all the many readings of the conception of capital, 
there is only one left oh the field, — only one, of which it can be 
said that it has stood all the tests. It is that which, by capital, ^~f 
understands an aggregate of products destined, not for imme- 
diate consumption or use, but to serve as means of acquisition.^] 
It is a conception which meets all our logical and termino- 
logical requirements. Logically it is unassailable, and it is 
suggestive ; so suggestive that it distances the most of its 
competitors, and is distanced by none of them. And, 
terminologically, its investiture with the title of capital 
best economises our terms, and agrees with that usage which 

1 Cours Complet, part i. chap. viii. It may be added that Say, in this and 
other passages formerly quoted, gives no less than four contradictory readings of 
the conception of capital. In one place, chapter viii., he explains it as products 
of labour which serve towards production ; and in the same chapter he speaks of 
it as the value of these products. In chapter x. (see above, p. 50) he makes it 
the talents and skill of the labourers ; and in chapter xiii., again, the persons of 
the labourers ! 

2 That theories of such doubtful value should commend themselves to the 
recognition of eminent jurists like Kuhnast may, perhaps, be explained by point- 
ing out that jurists, as having to deal in their systems, to a very great exteDt, 
with abstract persons and objects, have, generally, a strong tendency to hypos- 
tatic conceptions ; a practice which may be quite suitable for their special field 
of investigation, but is certainly misapplied in political economy. 


has taken most general and firm root in economics and in 

popular speech. Finally, it is the conception which most 

exactly coincides with the object of those great social problems 

of our time which people are in the habit of discussing as 

problems of capital. In its one division, as " Social Capital," 

it indicates the third instrument of economical production in 

Y" the triad of Nature, Labour, and Capital ; and in its other 

division, as " Private Capital," it indicates the third source of 

r-^the economical acquisition of goods by individuals in the triad 

j^ Rent of land, Wage of labour, Interest on capital. If, then, 

unbiassed people are ever to agree on a conception of capital, 

we may expect that this will be the one chosen. 



A FEW remarks still remain to be made on the relation in 
which the two divisions of our conception, Social (or Productive) 
Capital, and Private (or Acquisitive) Capital, 1 stand to one 
another. "When enumerating and reviewing the various 
theories, I have already expressed my views generally on this 
point, and may here shortly sum them up. Private Capital,*! 
as we now call it, is the parent conception. It is not so 
much a branch, or a subdivision of the general conception of 
capital, as the conception itself. The conception of National 
Capital, or, more correctly, Social Capital, has detached itself 
from the other, in the historical development of theory, as a 
narrower conception. Substantially it is a quite independent 
conception. In every essential respect (in definition, in 
scientific employment, and in scope) it stands on entirely 
independent principles. It is bound up with the conception 
of Private Capital only by the external and subordinate cir- 
cumstance, that the aggregate of its "intermediate products " 
happens to coincide in extent with the aggregate of those 
products which are the source of income to society as a whole, \ 
— those products which constitute capital in the older sense. 

1 As I have already remarked on p. 38 I consider the terms in brackets, 
Productive and Acquisitive Capital, as essentially the more appropriate. But 
since Kodbertus and Wagner the terms National and Private capital have 
been used almost universally, and as I consider it conducive to the final 
settlement of this jumble of terminology not to disturb names that are fast 
rooted in common usage, unless there is some quite overwhelming reason 
for doing so, I content myself with making the one change — which seems to 
me in any case indispensable — of the term "National" into the term "Social" 


But through a historical accident it is this subordinate feature 
that has had most to do with the naming of the new concep- 
tion ; and thus it also bears, and will perhaps continue to 
bear, the name capital. And this circumstance, so long as the 
whole relation was not clearly understood, led to the lament- 
able tangle so often spoken of, that not only the concep- 
tions themselves, thus similarly named, but the fundamentally 
distinct problems connected with them, were confused and 

This unfortunate confusion of the problems was first 
attacked, so far as I know, by Kodbertus, and his efforts were 
seconded with peculiar clearness by Adolf Wagner. In the 
course of this a new interpretation was given to the distinction 
between National and Private capital, which is highly interest- 
ing in itself, and which, at the same time, has been accepted so 
quickly and over so wide an area that I feel bound to take up 
a definite position towards it. Wagner, like Kodbertus before 
him, 1 makes a distinction between capital as a " purely economic 
category," and capital "in the historico-legal sense," or property 
in capital. " Capital as a purely economic category, considered 
apart from the legal relations which obtain as regards property 
in capital, is a store of those economic goods, — natural goods, 
— which serve as technical instruments to produce new goods 
to a community ; it is a store of productive instruments ; it 
is National capital (or a portion of such). Capital in the 
historico-legal sense, or property in capital, is that portion of 
a person's wealth which may serve him as a means of obtain- 
ing an income (Rent, Interest), and which, therefore, is owned 
by him to this end ; it is a Rent Fund, or Private Capital." 2 
In this the distinction between National capital and Private 
capital is narrowed down to the distinction between a natural 
store of goods on the one hand, and the legal rights which 
private individuals have over that natural store on the 

I am far from denying the very great importance and 
usefulness of this new distinction. Its appearance was an event 

1 See particularly Zur Erklarung und Abhilfe der heutigen Kreditnoth des 
Orundbesitzes, second edition, vol. i. p. 90, vol. ii. p. 286, where das reale Kapital, 
as consisting of the natural objects of capital, is sharply opposed to Kapitalbesitz, 
or property in capital. Similarly Das Kapital, pp. 304, 313, and passim. 

2 Wagner. Grundlegung, second edition, p. 39. 


of the first rank in economic criticism, and it has done good and 
laudable service in clearly stating the fundamentally distinct 
problems associated with the one name of capital. Without 
it, certainly, the far-reaching consequences of the other dis- 
tinction, that between Social and Private Capital, would never 
have been noticed. One thing, however, I cannot allow. It 
does not exhaust the meaning of this latter distinction, and, 
consequently, it is not exactly fitted to take its place. The 
categories of Social Capital and Private Capital on the one 
hand, and of Natural Capital and Property in Capital on the 
other, do not coincide, either in compass or in content, so as 
to allow us simply to explain or replace the former by the 
latter. They are rather independent categories, each of them 
resting on a different basis of distinction. Social Capital! 
and Private Capital are not distinguished from each other 
simply as a natural store of goods and property in these goods ; 
they represent two distinct natural stores of goods. Social 
Capital embraces only the means of production ; Private Capital 
embraces (also \ certain consumption goods. These distinct \ 
natural quantities or stores of goods, further, exert distinct 
economic functions. And if to these we add the further 
distinction that Social Capital is a category independent of 
any regulations of positive law, — is, that is to say, a purely 
economic category, — while all capital as Source of Income 
presupposes an owner, and therefore a right of ownership 
founded on history and law, then this is only one distinction 
out of many, and that not the peculiar and essential distinction. 
For if we were to drop the two former distinctions, and draw 
our dividing line according to the absence or presence of 
historico-legal claims of ownership, we should find that the 
division had made some very considerable changes in the 
constitution of the members. In the first branch, indeed, we 
should have as before Social Capital, the natural means of 
production. But in the second branch we should have only 
the same means of production now looked at as private 
property and as source of rent, and we should not have 
those consumption goods, such as dwelling-houses, libraries, 
etc., which serve as sources of rent. To cover these latter, 
and so fill out the compass of private capital to its true 
extent, we must set against the natural means of production 


not only private claims based on history and law, but also 
another natural store of goods that is still more extensive. 

Perhaps the peculiar inappropriateness of confusing these 
two distinctions may be most strikingly shown by taking an 
exactly analogous example. If one were asked to characterise 
the distinction between the two conceptions " producing " and 
" exchanging," and were to answer that production is a purely 
economic category, whilst exchange, as presupposing the exist- 
ence of private property, is a historico- legal phenomenon, 
the answer would scarcely be taken as sufficient. We should 
certainly have the impression that it gave us a distinction but 
not the distinction between producing and exchanging. For 
the essence of exchanging obviously does not consist in its 
being a " historico-legal category." It is also a very important 
economic category; indeed, it is just such another as produc- 
ing ; and one who would explain both conceptions must, at 
once and before anything else, establish the distinction between 
the economic nature of the two. And, similarly, in this 
opposition between " purely economic " and " historico-legal " 
categories, a distinction is put forward — and a very important 
distinction, — but not the characteristic distinction between 
Social and Private Capital. 

Let me say once more that I consider the distinction made 
by Rodbertus and Wagner between natural capital and pro- 
perty in capital a very important one indeed, and one which, 
in any case, must also be drawn. What I want to point out 
is, that it should not be confused with the distinction between 
social and private capital, which rests on an entirely different 
basis ; and the definition of social and private capital should 
not be based on characteristics borrowed from another and 
totally different distinction. 

The example of Eodbertus himself is the best proof that 
this is not simply a quarrel about formulas. His one-sided 
conception led him directly into a false theory of interest. In 
his view the essence of private capital consisted in the historico- 
legal circumstances of force that were connected with it ; and 
he was thus logically committed to explain the interest on 
private capital simply and solely from the existence of those 
circumstances. Interest to him was robbery ; a profit which 
the owners of capital squeezed out of the labourers in virtue of 


the brute strength which their exclusive property in the means 
of production gave them. 1 

If, on the other hand, Eodbertus had attended to the 
peculiarly economic side of the matter, he would have found 
that that other natural complex of goods, called private capital, 
has exerted and continues to exert a peculiar economic function 
quite equally with social capital ; and, further, he would have 
found that it is simply as the natural fruit of this economical 
element that interest originates. Thus he would have found 
that interest is not purely a growth of history and law, but 
an original economic growth, the emergence of which is, to a 
certain extent, independent of the form which history and law 
have given it. This will be shown with sufficient clearness, 
I trust, in the investigations into the origin of interest which 

Before concluding this chapter there is still one question 
to be put : What in the concrete are the groups of goods that! 
constitute Social capital, and what Private capital ? The 
answer to this should, by rights, follow from the very definition 
of the two conceptions. But peculiar circumstances have led 
to disputes not only as to the correct definition, but even as 
to the compass which was to be allowed to each conception in 
conformity with the accepted definition. It is well, therefore, 
to be quite clear on this point. 

Social Capital, as an aggregate of products destined to serve / 
for further production, covers — 

1. Productive improvements, arrangements and disposi- 
tions of land, so far as these preserve an independent character, 
such as dams, drains, fences, etc. So far, however, as they 
are completely incorporated with the land, they are to be kept 
separate from capital for the same reasons which made us 
keep land itself separate from capital. 2 

2. Productive buildings of all sorts — workshops, factories, 
sheds, steadings, shops, streets, railways, and so on. Dwelling- 

1 See my criticism of this theory in Capital and Interest, p. 337. 

2 I may be accused of want of logic here on the ground that such improve- 
ments are always products which serve towards further production, and therefore 
come under our definition of capital. The criticism is correct as to the letter, 
but wrong as to the spirit. A stay propped up against a tree is certainly not 
the tree itself but an outside body. But who would still call it an outside body 
if after some years it had grown inseparable from the tree ? 



houses, however, and other kinds of buildings, such as serve 
immediately for any purpose of enjoyment or education or 
culture, e.g. theatres, schools, churches, law courts, do not 
come under Capital. 

3. Tools, machines, and other kinds of productive utensils. 

4. Useful animals and beasts of burden employed in pro- 

5. The raw and auxiliary materials of production. 

6. Finished consumption goods in the hands of producers 
and merchants as (warehouse) stock. 

7. Money. 

At the first glance the two latter categories may be called 
in question. Consumption goods as found in warehouses are, to 
all appearance, no longer " intermediate products," but " finished 
goods," and Money is not a tool of production but a tool of 
exchange. Still, I think it correct to put both conceptions 
under capital. They both serve to complete a roundabout] 
way of production. When, in order to take advantage of more 
favourable conditions, goods are produced, or caused to be 
produced, at a different place from where they are demanded, 
it is nothing else than a peculiar kind of roundabout process. 
The consequence then is — and it is here that the "round- 
aboutness," which is to be understood literally in this case, 
comes in — that, after the product is technically finished, it 
must be conveyed to the place where it is demanded. All 
this is done very often inside the narrow limits of an isolated 
economy ; the peasant must bring his harvested grain from 
the field, his felled wood from the forest. But it is done, on 
an immensely greater scale, in the wider field of social produc- 
tion and divided labour. Just as the peasant may raise his 
crop a quarter of an hour's distance from his house, or cut his 
wood an hour's distance off, because in this way he can best 
utilise the conditions of production, so for good reasons it is 
quite common in organised and divided industry to obtain the 
objects of our demand from other people's workshops, indeed 
often from other places, other lands, other continents; and then, 
naturally, in the end we have to provide their means of 
conveyance. In the one case as in the other the conveyance 
forms the last act of production, and before this last act is 
finished we cannot properly say that the products are ready 


for human consumption. So, just as everybody would include 
among instruments of production and capital the horse and 
cart which assist the peasant in carrying in his grain and 
wood, must we reckon as capital the objects and apparatus of 
that more extensive " leading in " of the national harvest — the 
conveyed products, the streets, rails, ships, and the commercial 
tool money. It may be noted, besides, that those commercial 
roundabout ways, arising out of the division and organisation 
of labour, rank, as regards the advantage they confer, along 
with the other technical roundabout ways. They are as 
profitable as, or even more profitable than, any of the capitalist 
methods of production to which the most famous technical 
inventions have led. 

These seven categories exhaust, in my opinion, the group 
of things which coDstitute Social Capital. It goes without 
saying that economists who take another view of the concep- 
tion of capital add other categories, such as land, durable 
consumption goods, the person of the labourer, and so on, 
and this needs no further elucidation here. It is surprising, 
however, to find writers, who take exactly the same view of 
the conception as we do, proposing to add certain other 

Most surprising of all in this connection is the unanimity 
with which economists, from the earlier English writers down_ 
to Adolf Wagner, 1 put the maintenance of productive labourers ' 
under social capital. Certainly the real wages of the labourers'! 
— the articles of food, clothing, fuel, lighting, etc., which the 
labourers use — are, from the standpoint of the undertaker 
who advances them, his private capital. But it is just as 
clear in my opinion that, from the standpoint of the whole 
community, these objects cannot be counted capital if capital] 
is defined as a complex of means of production. The conception 
of " means of production " should and does form an antithesis 
to the conception " means of consumption." There cannot be 
the slightest doubt as to the meaning of this antithesis, and 
just as little can there be as to the fact that the workers' 
subsistence is the immediate instrument to the satisfaction of 
their wants, and that labourers are men and members of 
society. But if this is so, it seems to me absolutely proved^ 
1 Grundlcgung, second edition, pp. 39, 43. 


that the maintenance of the labourer must be classed along 
with wealth destined for consumption and for the immediate 
satisfaction of the wants of society, and not with the means of 
production or capital. It could only be otherwise if the 
labourers were to be looked upon, not as members of the civil 
society in whose interest industry and commerce are carried 
on, but as material machines of labour. Then, but only then, 
the maintenance of the labourers would, as a matter of course, 
fall under the same category as the feeding of beasts of burden 
and the stoking of furnaces ; it would be a means of produc- 
tion, or capital. The idea, however, scarcely needs refutation. 

It may be pointed out, however, that productive labourers 
are not simply consuming subjects, but are also active 
economical instruments ; and that, consequently, the subsistence 
which does directly serve for the maintenance and furtherance 
of their life indirectly serves towards the further production 
of goods. But in this case a simple indirect relation to 
production is not sufficient. For it is easy to see that the 
distinction between means of production and means of con- 
sumption has a meaning only if it refers to the immediate 
destination of goods. If we were to take notice of their 
indirect or mediate destination we should require to put all 
goods without exception under the category of meana of 
consumption, since even the means of production serve in- 
directly to the satisfaction of human wants. Then this raises 
another difficulty. The division of goods into goods for 
consumption and goods for production is intended to be a real 
division ; it should be based on an opposition. Now it is 
impossible to deny that the food which the labourer consumes 
serves for the immediate satisfaction of the wants of a member 
of the community; that is, it corresponds entirely to the 
definition of a consumption good. How then could we class a 
thing which has all the properties of one category under the 
category opposed to it ? Thus, as is so often the case, the 
laboured explanation leads us into a net of confusion, and the 
simplest is the truest. The goods with which the working 
members of the community feed, heat, and clothe themselves, 
are goods for immediate consumption, not means of production. 

That, in face of arguments so obvious, the opposed doctrine 
should be held so universally and so tenaciously is a pheno- 


menon scarcely intelligible at first sight, but easily explained 
when we^inquire more closely into the circumstances of the 
case. Two! powerful factors, I think, co-operated towards \£T1 
One was-'historical tradition, which, in this case, was very 
strong and deep-rooted. It should not be forgotten that the 
inclusion of the labourers' maintenance into the conception 
of capital came at a time when the conception itself was not 
yet clearly defined, and when, in particular, Private capital, to~j 
which the labourers' maintenance in any case belongs, was not 
yet sharply divided off from Social capital, to which it does not 
belong. This was assisted by the peculiar view, dominant for_J 
a long time, that the function of capital was the " putting of 
labour in motion" — a function which the labourers' main- 
tenance conspicuously realised. It was assisted, moreover, by 
the famous Wage Fund theory. That theory made the rate of 
wages depend chiefly on the proportion between the number of 
labourers and the amount of the Wage Fund ; that is, the ^ 
amount of capital destined for the support and payment of the ^ 
labourers — an idea which helped to connect the means of sub- 
sistence still more closely with the conception of capital. And, 
finally, a£ot|ier impulse in the same direction may have been 
given by the frequently and justly criticised tendency of the 
English school to look upon the labourer as a machine of 
production, and to consider his wage simply as an element of 
the costs of production — a deduction from the national income 
and not a part of it. 1 

Eesting on such a wide basis of support, the proposition 
that the maintenance of productive labourers forms an element 
in Social capital worked its way by degrees so firmly into the 
scientific consciousness, that it was considered by many as an 
axiom quite above discussion ; and in the end it was able to 
maintain its position on the strength of its own authority, 
even after the ground had really been taken from under it by 
the discovery of the distinction between Private and Social 
capital, and by the definition of the latter as an aggregate of 
means of production. 

The second factor has had even more effect than the 
weight of historical tradition ; and not only has it co-operated 
in the past in the creation of these traditions, but it still 
1 See Schmoller, Tiibinger Zeitschrift, vol. xix. (1863), pp. 10, 25. 



asserts its living influence. That factor was, if I am not 
very much mistaken, the conscious or unconscious inclination 
towards another reading of the conception of capital than that 
recognised in what we may call the official definition. Econo- 
mists have stood, and still stand, in hesitation between those 
two conceptions which have the most numerous and suggestive 
relations to the problems of capital — the conception of " pro- 
duced means of production " and the conception of " national 
subsistence fund." 1 In the official definition, it is true, .the 
preference was finally given to the " produced means of 
production"; but economists, quite rightly feeling that the 
"national subsistence fund" had also something to do with 
the theory of capital, could not quite give up this con- 
ception. And thus they put together a hybrid conception, 
adding to the Means of Production proper, which had the 
stamp of the official definition, a portion of the Subsistence 
Fund conception, in the maintenance of productive labourers. 
Of course a classification like this, which is nothing else than 
the result of uncertainty and compromise, cannot be satis- 
factory. Economic theory must make decisive choice between 
the two competing conceptions, and, however the choice turns 
out, the conception will be limited and determined other- 
wise than it is by the writers now being criticised. Either 
we shall decide for that conception which makes capital 
an aggregate of Intermediate Products — and this choice, for 
reasons of appropriate terminology already stated, I consider 
the happier one — and in this case the labourers' mainten- 
V ance falls outside the conception ; or we shall give the name 
capital to the Subsistence Fund which makes the roundabout 
way of production possible, and then, as will be shown later, 2 
not only must the means of subsistence of the productive 
labourers be reckoned as capital, but also the subsistence of 
the capitalists and landowners, as standing in exactly the same 
indirect relation to the adoption of "capitalist" methods of 
production. If all this cannot justify, it may at least explain 
the phenomenon otherwise almost incomprehensible, that, in 
fiat contradiction to the official definition of capital, people 
continue to add to it the maintenance of the labourers ; and 

1 See above, p. 42. 
1 See also above, p. 43, note 1. 


perhaps the exposure of this origin may help to put an end 
to the curious habit. 1 

Another category which seems to me wrongly placed among < 
the constituents of Social capital is the so-called " incorporeal 
capitals," such as debts and other kinds of claims, goodwill of 
businesses, the state, etc. These things are not capital, because 
they are not real goods. They are, as I have shown at length 
in another place, 2 nothing but representative words or collect- 
ive names for a sum of real goods, which may be capital, 
or may not. If they are, then they are already contained in 
our seven categories ; if they are not, we should not, of course, 
open a. special category for them. 

Finally, Private capital consists of the following : — 

1. All goods which form Social capital. 

2. Those consumption goods which their owners do not 
use for themselves, but employ by exchange (sale, hire, loan) 
in the acquisition of other goods, e.g. let-houses, lending- 
libraries, means of subsistence advanced by undertakers to . 
their labourers, and many others. —■ 

1 The case is exactly the same with the notorious Wage Fund theory. In it 
also I see a misbegotten fruit of an idea which is quite right in itself. It is, as 
we shall see later, a very unsuccessful attempt to express certain relations that 
really do exist between the national subsistence fund on the one hand, and the 
height of wage and interest on the other. Against the inclusion of the labourers' 
means of subsistence in national capital Rodbertus has expressed himself in a 
quite classical style, Das Kapilal, p. 294, and before that in his Zur Erkennlniss 
miser, staatsw. Zustdnde, theorem i. Very clear and convincing, too, is Gide, 
Principes d'Economie Politique, Paris, 1884, p. 150. See also Sax, Grundlegung, 
p. 324, note. 

2 Rechte und Verhaltnisse vom Standpunkte der volks. Guterlehre, 1881, passim. 
Since then, see H. Dietzel {Der Ausgangspunkt der Socialwirthschaftslehre und 
ihr Grundbegriff, in the Tiibinger Zeitschrift, 1883, p. 78), and Sax {Grundlegung, 
pp. 39, 199), who surely goes too far in excluding personal service from the con- 
ception of goods. Neumann, on the other hand (Schonberg's Randbuch, 
second edition, p. 151), remains firm in recognising rights and relations as real 
goods on grounds which do not commend themselves to me as at all convincing. 
On one single point I feel myself bound to reply. In my definition of the con- 
ception of goods, Neumann "does not find" the lines sufficiently distinctly 
drawn, and quotes, in a tone of irony, a number of expressions which, taken by 
themselves, certainly do not draw any distinct line {ibid, note 41). But Neu- 
mann can only have read portions of the work he objects to, or read it very 
hurriedly. Otherwise it would not have escaped him that the expressions he 
quotes stand at the end of a chapter {Rechte, p. 29), and that the beginning and 
middle of that chapter (p. 13 onwards) are devoted to what he "does not find," 
and that, obviously, the later expressions are to be taken and understood along 
with what goes immediately before. 


Many writers add certain " relations," patents, 1 trade con- 
nection, 2 legal claims. 3 These, of course, on the same grounds 
of theory as above, I must reject as constituting an independent 
category of capital. 

And now, after this very lengthy introduction, which can 
only be excused by the singular confusion in which we found 
the theory, we may turn from the conceptions to the prob- 
lems which are associated with them. In the book which 
follows we shall work out the theory of the conception we had 
to glance at in the two first chapters of the present book ; the 
theory of capital as Instrument of Production, or the theory 
of Social Capital. 4 

1 Wagner, Grundlegung, second edition, p. 42. 

2 Roscher, Grundlagen, eighteenth edition, § 42. 

3 Hermann, Stoats. Untc rsuchungen, second edition, p. 122. 

4 The careful reader will, without douht, have remarked that the statement 
as to the nature of capital given in the second chapter, relates solely to Social 
economic capital. For ohvious reasons I did not wish to mix up the dogmatic 
statement with the terminological and critical discussion which, I am afraid, has 
been terribly prolix. And, for reasons as obvious, I did not wish to commence 
this discussion without having, at least partially, put before my readers the object 
to which the discussion refers. I therefore made use, for the time being, of the 
word Capital without any of the clauses and additions which would at once have 
necessitated the tedious terminological discussions I wished at the time to avoid. 
The more exact explanations which follow will prevent any misunderstanding to 
which this may, perhaps, have given rise. 





In expounding the theory of capital as Instrument or Tool or 
Means of Production we have to describe and explain the 
emergence and effects of capital in the economic production 
of goods. What we have to say on this matter groups itself 
round two questions : How does capital originate ? and what 
is the nature of its productive work ? The first question has 
to do with the theory of the formation or accumulation of 
capital ; the second, with the productive function of capital. 

The reader who has waded with us through the dozen 
theories and dozen definitions of capital will scarcely be sur- 
prised at meeting a similar divergence of opinion on the ques- 
tion we have now to consider. Of course there is no dispute 
about the fact that capital is, in the highest degree, useful to 
production. But I am much afraid that this is the only 
proposition on which our economists are quite agreed. So 
soon as the further question is asked : In what does this 
usefulness consist, or what character does the co-operation of 
capital in itself bear? — agreement is at an end. One finds 
the utility of capital in putting labour in motion ; l another, 
in saving or supplanting labour ; 2 a third, in performing 
labour ; 3 a fourth praises it as giving man the mastery over 
the powers of nature ; 4 and a fifth, as enabling the labourer 
to " put an interval between the beginning and the end of an 

1 Adam Smith, book ii. chap v. 

2 Lauderdale, Etvauiry, p. 161, passim. 

3 Lauderdale, ibid. So also J. B. Say, " II faut, pour ainsi dire, que les capitaux 
travaillent de concert avec Findustrie " {TraiU, i. 3). 

4 Strasburger, Hiklebrand's Jahrbilcher, vol. xvii. (1871), p. 325 ; and Carey. 

76 INTRO D UCTOR Y book i i 

enterprise." 1 Some, like Lauderdale, see in it an independ- 
ent, original factor of production along with land and labour ; 
others, like Gide, call it an independent but still merely 
derivative factor. Kleinwachter looks on it simply as a 
" condition " ; Carey, again, as an " instrument " or " tool " of 
production. Indeed, our theorists cannot even agree as to the 
way in which that useful auxiliary of production comes into 
existence. If we ask the question concretely : How is a plane, 
or a plough, or a steam-engine made ? — they would probably 
be able, with perfect certainty, to give minute information 
as to how those concrete portions of capital come into existence. 
But whenever they have to generalise what they have observed, 
they divide into hostile camps. Capital originates in saving, 
says one ; no, says another, it must be produced ; while a 
third proclaims that it originates in the two together. 

It is a much greater cause for wonder that economists 
came to no agreement in these and similar questions than that 
they remained apart in their theories of interest. The task 
here was quite different, and essentially easier. In the interest 
theory the difficulty is to give the proper explanation of facts 
which are really much entangled, while here there is almost 
nothing to do but to describe the facts correctly ; and facts, 
moreover, with which everybody is quite familiar. As we 
have said, every one knows how a plane or a steam-engine 
comes into existence. Similarly every one has a sufficiently 
exact idea what and how a plane, a machine, a plough, a raw 
material, does in production. It was only necessary to leave 
out everything peculiar in those cases, and to describe in 
appropriate words everything universal and typical in them, 
and the theory of the formation and function of capital would 
almost have been written. 

The reason why economists failed in this simple task was 
that they did not allow the facts to speak for themselves. 
Instead of simply describing them as they were, explanations 
were read into them and added to them ; one feature was 
pushed into the foreground, another kept in the background, 
a third was quite overlooked, while perhaps a fourth was 
entirely absent, but was read into them. When every man 
had thus imported his own particular views bodily into the 

1 Jevons, Theory of Political Economy, second edition, 1879, p. 243. 

chap, i INTRODUCTORY 77 

facts, it was, of course, no wonder that everybody got some- 
thing different out of them. 

To my mind the most important duty of the theorist in 
such a case is to avoid the faults we have just condemned. 
To make certain of this we shall make a clear distinction, even 
in outward form, between the statement of the facts and the 
interpretation of them. The next chapter, therefore, will 
delineate and describe the process of capitalist production. 
When a solid basis of fact has thus been obtained, the inter- 
pretation and construction will follow in the chapters on the 
productive function of capital, and- on the theory of the forma- 
tion of capital. 1 

1 In economic literature tlie clearest views as to the nature of capitalist pro- 
duction are, in my opinion, to be found in Rodbertus, Jevons, and Carl Menger. 
The works of Rodbertus, where they are not directly disfigured by the influences 
of his one-sided Socialist standpoint, are of quite classical accuracy and clearness. 
Unfortunately there are certain features which very sensibly mar what he has 
said. This is true in particular of his omission to notice the share which the 
valuable natural powers take in production, and the influence of time — two 
things which, obviously, could not easily be fitted into the "exploitation" 
theory he maintained so vigorously, and so were suppressed. We shall see this 
more fully later on. Carl Menger, again, by his arrangement of goods according 
to "rank" (Grundsdtze, p. 7), and his statement of the laws which connect 
together goods of various ranks, has given at once a brilliant proof of his clear 
insight into the developed phenomena of production, and an invaluable tool to 
the hands of succeeding investigators. 




We have already sketched, in its most general outlines, the 
process of capitalist production. 1 There are certain features 
of it which now require more exact treatment. I shall briefly 
recapitulate, interpolating what remains to be said as we go 

All human production aims at the obtaining of goods for 
consumption. These consumption goods are dependent for 
their existence on physical conditions, and are subject to 
natural laws. To obtain them, as we have seen, we must seek 
to bring about such combinations of active forces as will 
result in the desired object. Thus we get a product which 
has come into existence under natural law and continues to 
exist under natural law. Now look a little more closely at 
the nature of the power which man can employ towards these 
productive combinations. It is made up of two components 
very dissimilar in amount — first, an enormous mass of powers 
which the natural world exerts spontaneously year out year 
in ; and second, the much more limited natural powers which 
reside in the human organism. 

The natural world, in midst of which man lives, is 
endowed with a vast number of forces which are never for a 
moment idle. Gravitation holds this ball of earth together ; 
keeps all things fast to its surface ; makes the rain fall to 
earth, and rolls streams and rivers to the sea ; governs the 
ebb and flood of the tides ; works unceasingly at every point 
of the earth's crust as stress, weight, pressure. The -sun 
sends our earth light and heat, and thereby develops an 

1 Book i. chap. ii. 


infinity of mechanical and chemical processes, of which vegeta- 
tion particularly attracts our attention, both by its mysterious 
magic and by its enormous importance for the human race. 
Uncounted and countless again are the molecular, electric, and 
chemical effects and counter -effects which every atom of 
matter exerts without intermission on its neighbours. The 
total of those energies which nature pours forth in ceaseless 
stream, without help from man, we may look upon as one 
branch of the productive endowment of humanity ; and this 
extremely valuable branch we shall call man's natural endow- 
ment. It is an infinite treasure-house from which the pro- 
ducing man may draw as much as he will and can. As yet 
it is only the very smallest part of this treasure that has 
been touched. As yet by far the greater portion of the 
energies of nature pass away in combinations which, from the 
human teleological standpoint, seem useless or even harmful. 
The resistless rise and fall of the tide, the rush of rivers and 
waterfalls, the atmospheric movements, the giant forces of 
electricity, magnetism, and gravitation slumbering in our 
earth, are powers turned to human account only to a very 
small extent. Others again, such as the vegetative powers of 
land, have been utilised to a greater, but still very far from 
complete extent. The steady advancement in agricultural 
science not only leads us to expect a constantly increasing 
amount of utility from the land, but makes us suspect that the 
possibility of such advance is still far from being exhausted. 

Now, as we have seen, the way in which we get command 
of these natural treasures is through the other branch of our 
productive endowment, our own personal powers. We put 
forth our labour in all kinds of wise combinations with natural 
processes. Thus all that we get in production is the result of 
two, and only two, elementary productive powers — Nature and 
Labour. This is one of the most certain ideas in the theory 
of production. Man finds ready to hand an abundance of 
natural processes, and allies his own powers with them. What 
nature by herself does, and what man does along with her — 
these form the double source from which all our goods come, 
and the only source from which they can come. There is no 
place for any third primary source. 

These two elements, then, technically do everything in the 


work of production. But, economically, a further and very- 
suggestive limitation must be drawn. Of the vast natural 
endowment which serves as foundation for man's productive 
combinations, one portion particularly claims the interest of 
economics, and that is, those useful things offered by nature 
only in limited amount. In nature, indeed, there is no lack 
either of materials or powers; carbon and nitrogen, oxygen 
and hydrogen — generally speaking, most of the "elements" — are 
per se not more scarce than are electrical, magnetic, chemical, 
and gravitation forces. But certain spontaneous combina- 
tions of these elements that are peculiarly well adapted to 
human want may be, relatively, scarce ; such, for example, as 
useful plants and minerals, water for driving power, fertile 
land, etc. These limited gifts and energies of the natural world 
obtain for us a peculiar economic importance. It would be 
foolish not to economise them. Technical elements of produc- 
tion which we may have in any quantity, like atmospheric air 
or water or sunlight, we may employ or waste as we please 
without suffering loss in our productive returns. But the 
limited technical elements must be treated with consideration, 
must be saved, must be fully utilised. In a word, within the 
technical natural endowment, as a wider circle, they form the 
specifically economic natural endowment of man. Since all, or 
at least almost all, limited gifts and energies of nature are con- 
nected with land, we may, without much danger, take Land, 
with its activities or uses, as the representative of this economic 
natural endowment. 1 

To the uses of land the exertions of labcur form the 
counterpart. Labour has almost entirely an economical char- 
acter. This is due partly to the fact that physical strength is 
given us in such scanty measure, as compared with the very 
extensive claims put forward by human needs, that even the 
most assiduous exertions of labour power cannot fully satisfy 
our desire for goods, not to speak of supplying them in super- 
fluity; partly to the fact that the exercise of our powers is 
usually attended by the painful feeling of distress and fatigue 

1 "Where population is scanty, of course, it is possible that land, or at least 
certain of the uses of land, such as the growing of timber, may be free goods, as 
obtainable in any quantity. But in modern communities, to which naturally I 
refer by preference in this statement, the uses of land — with the exception of 
waste land or desert— are entirely economie goods. 


— at least when carried beyond a certain point, 1 — and the 
feeling warns us to econonnse our labour. 

Nature and Labour are, then, the technical elements of 
production ; Uses of Land and Labour are the economic 
elements. These latter are the talents which the producing 
man puts out at usury with nature, with her great fruitful soil 
and infinite store of force. They are the only powers that 
require economic treatment, inasmuch as the co-operation of 
the free natural powers, which, technically, is also indispensable, 
is given without question and without cost. It is only the 
man who has command over the requisite uses of land and 
services of labour who receives the desired economic product ; 
the man who has not these must do without the product ; the 
man who owns a double allowance or a half allowance of them 
will — if the technique of production remain the same — receive 
double or half the product. In production, therefore, they are 
the only powers with which the economic community has any 
concern, and with which it has to reckon. In short, land and 
labour — or, more accurately, uses of land and services of 
labour — are the primary economic productive powers. 2 

Now in what way does man use these original productive 
powers ? In answering this question we turn back for a little 
into familiar paths. 

To construct goods for human consumption out of these 
productive elements man may take one of two ways. He may 
combine the economical productive powers with one another, — or 
with activities of free natural powers, — in such a way that the 
desired good immediately emerges as result of the combination ; 

1 On the common experience that "as labour is prolonged the effort becomes, 
as a general rule, more and more painful," see Jevons, Theory of Political 
Economy, second edition, p. 185 ; and Gossen, Entwicklung der Gesetze desmensch- 
lichen Verkehrs, 1854. 

3 This is the state of the case, as I believe, expressed with perfect clearness 
in the facts, and this is what Rodbertus profoundly misunderstood when he 
maintained, and repeated with emphasis, that labour is the sole original power 
with which human economy has anything to do, and drew from that the conclu- 
sion that all goods, economically, are to be conceived of as products of labour 
alone {Zur Erkenntniss unserer stoats, Zustande, theorem i. ; Zur Erklarung, 
second edition, p. 160 ; Zur Eeleuchtung, p. 69). If to-day we allow a fruitful 
field to lie fallow, or a mine or water power to remain unexploited ; if, in short, 
we do not act economically with valuable uses of land, we act as directly against 
our economic well being as when we throw away labour uneconomically. 


as when he gathers shellfish on the shore. Or he may take a 
roundabout way, and, with the element at his command, may 
make, first, another good, and then, with its assistance, the 
good he wishes ; as, for instance, when he makes a boat and 
net and takes to fishing systematically. We already know 
that the former method is identical with what the Germans 
call kapitallos production, the latter with capitalist production ; 
and that the intermediate products, which come into existence 
in the course of the indirect methods, represent economic 
social capital. 

The adoption of capitalist methods of production is followed 
by two consequences, equally characteristic and significant. 
One is an advantage, the other a disadvantage. The advan- 
tage we have already looked at ; it consists in the greater 
technical productiveness of those methods. With an equal 
expenditure of primary productive powers 1 (that is to say, 
labour and valuable natural powers) more or better goods can 
be produced by a wisely chosen capitalist process than could 
be by direct unassisted production. This proposition, which 
is quite convincingly accredited by daily experience; we illus- 
trated and tried to explain in the second chapter of Book ,1. 
by a number of examples. We found the explanation to 
be that, when roundabout methods are skilfully chosen, new 
allies are obtained from the immense stores of natural powers, 
and their activity is enlisted in the work of production. It is 
this well-known fact that is usually indicated by the term 
" productivity of capital." This name, however, imports into 
the facts a particular interpretation, the correctness of which 
has yet to be examined in the next chapter. 

The disadvantage connected with the capitalist method of 
production is its sacrifice of time. The roundabout ways of 
capital are fruitful but long ; they procure us more or better 
consumption goods, but only at a later period of time. This 
proposition, no less than the former, is one of the ground 
pillars of the theory of capital. We shall see later on that 
the very function of capital, as a means of appropriation or 
source of interest, to a great extent rests upon it. I must, 

1 "Primary productive powers" is the more correct expression, which we 
must now employ instead of the partial expression " labour" used by me in the 
second chapter of Book I. in order to avoid tedious explanations. 


therefore, guard it against any misunderstanding by the two 
following remarks. 

In the first place, it may very well happen, in an exceptional 
case, that an indirect method of production is not only better 
but speedier. A man wishing to gather apples from a high 
tree will evidently attain his purpose sooner by first cutting a 
stick from another tree, and using it to knock down the apples, 
than by climbing the tree and trying to break off the apples 
one by one with his hand. But this is not the rule. In the 
overwhelming majority of cases we must tread the roundabout 
ways of capitalist production under technical conditions of such 
a nature that we have to wait, and often for a very long time, 
before we get the ripe final product. Instead of giving examples 
which must occur of themselves to every reader, I would rather 
draw attention to the fact that, in the loss of time which is, as a 
rule, bound up with the capitalist process, lies the sole ground of 
that much-talked-of and much-deplored dependence of labourer on 
capitalist. If capitalist production led as quickly from the hand 
to the mouth as unskilled direct production does, there would 
be nothing to hinder the workers carrying on such roundabout 
methods from beginning to end on their own account. They 
would still be dependent on the landowners, who could prevent 
them from access to the land which at the outset they require, 
but they would not be dependent on the capitalists. It is only 
because the labourers cannot wait till the roundabout process — 
which begins with the obtaining of raw materials and making 
of tools — delivers up its products ready for consumption, that 
they become economically dependent on the capitalists who 
already hold in their possession what we have called " inter- 
mediate products." l 

1 It is very characteristic that Rodbertus, when describing the economical 
effects of adopting roundabout ways of production, chocks his illustration just 
out of that minority of cases where the roundabout way is the quicker (Das 
Kapital, p. 236). The consequence is that, on this and other occasions, he leaves 
in the shade all the economical elements which form the basis of the phenomenon 
of interest — and of these the most notable is the loss of time connected with 
the carrying through of productive methods — and, taking a very one-sided view, 
lays the origin of rent at the door of the existing circumstances of private right 
[e.g. p. 310). But private rights in capital would not, by themselves, do any 
harm to the labourers, and it would be very easy for them to avoid the toll-bars 
which the capitalists have erected, if the fatal lapse of time between beginning 
and end of the lengthy capitalist process did not make it impossible for labourers 
to adopt similar processes on their own account. 


Again — though this scarcely needs pointing out — when we 
speak of capitalist production taking time, it is not relevant to 
raise the objection that, with a piece of concrete capital once 
made, say a tool, a definite product can be made more quickly 
than it could be without the assistance of capital ; that, for 
instance, a tailor takes three days to sew a coat by hand, and 
one day to do it with a sewing-machine. For it is clear that 
the machine sewing forms only one part, and indeed the 
smaller part, of the capitalist process ; the principal part falls 
to the making of the sewing-machine, and the total process 
lasts considerably longer than three days. 

Thus far we have considered capitalist production as an 
undivided whole, and have contrasted it with production 
carried on entirely without capital. But here we are reminded 
of a fact that has to be reckoned with, viz. that in capitalist 
production there are stages and degrees ; to speak accurately, 
there are innumerable degrees of " Capitalism." In the 
making of a consumption good the possible roundabout methods 
are of very varying length. We may make intermediate 
products from which the final good will be obtained in a 
month, or a year, or ten years, or a hundred years. The 
question now is, what influence such differences of degree have 
on product. 

On the whole it may be said that not only are the first 
steps more productive, but that every lengthening of the 
roundabout process is accompanied by a further increase in 
the technical result ; as the process, however, is lengthened 
the amount of product, as a rule, increases in a smaller 

This proposition also is based on experience, and only on 
experience. What it says must be simply taken as a fact of 
the technique of production. The reader, moreover, will easily 
be able to check its accuracy if he follows in thought the steps 
which lead to the production of any consumption good. For 
instance, firewood can be got quite directly so long as we limit 
ourselves to the gathering of dry branches or breaking off of 
weak twigs. We take a short roundabout path in making 
and using a stone axe. A longer process involves digging ore 
out of the ground, getting the fuel and necessary tools, and 
smelting iron out of the ore, working up the iron into steel, 


and finally turning out a finished steel axe. Beginning 
farther back, we may construct cunning machinery for mining 
and raising the ore, elaborate blast furnaces for smelting it, 
special machines for making and sharpening the axe. Going- 
farther back still, we may put up engineering shops and 
machinery for constructing each kind of appliance, and so on. 
It will scarcely be doubted that every additional step increases 
the productiveness of the total process ; that is, results in 
the obtaining of the unit, say the cubic foot of wood, at a 
smaller total expenditure of labour (mediate and immediate). 
But just as little will it be doubted that the first two pro- 
ductive methods, the use of the stone axe and then of the 
steel axe, must have caused a much greater revolution in the 
productiveness of woodcutting than the later improvements, 
although, absolutely, these may be by no means inconsiderable. 

If necessary, this may easily be proved to demonstra- 
tion by a little calculation. Assume, for example, that 
a labourer working with his hands can cut in one day 2 
cubic feet of wood, and working with a stone axe, which 
has taken three days to make, can cut 1 cubic feet : the 
three days' capitalist process is rewarded by a surplus return 
of 8 cubic feet per labour day. Now possibly the doubling of 
the process — say that the more careful fashioning of the stone 
axe takes six days — may also double the surplus return, and 
give 16 cubic feet. But it is scarcely likely that trebling the 
roundabout process can treble the surplus return. And it is 
quite certain that extending the roundabout process a thou- 
sandfold — say by sinking of pits, from which the ore for the 
axe may be got after years have elapsed — will not be able to 
increase the surplus return a thousandfold. Otherwise we 
should have the all but inconceivable possibility that a worker 
in one day could cut 8000 feet of wood! From some one 
point — probably a point not far off- — the surplus, though still 
increasing, will increase in a less ratio than the production 

Of course in such cases no definite figure can be named, 
either for the point from which the productiveness of further 
extensions of the process begins to decrease, or, speaking 
generally, for the amount of surplus result connected with any 
definite length of process. These data vary according to the 


technical circumstances of each branch of production, and at 
each stage of productive skill. Every new invention alters 
them. The discovery of gunpowder, for example, opened up 
at a flash the possibility, which did not exist the moment before, 
of increasing the productiveness of the chase by perhaps one 
half, and the productiveness of stone-quarrying by perhaps a 
hundredfold. 1 We may, however, with sufficient confidence 
repeat the proposition already formulated, that every exten- 
sion of the production process (so far as it is wisely chosen, 
of course) leads, generally speaking, to some surplus result. 
It may be confidently maintained that there is not one 
branch of production the returns of which may not be 
considerably increased in this way, as against the method of 
production prevailing at the time ; and that without any new 
invention, but simply by the intercalation of intermediate 
members long familiar to capitalist production, — whether it be 
by the adoption of a steam motor, or an apt transmitter, or 
some ingenious gearing, blast, lever, regulator, or the like. 
How far behind, indeed, in capitalist equipment are the most 
of our agricultural and industrial businesses compared with 
the most advanced typical businesses ! And certainly these 
latter are no less far behind an ideally perfect equipment. 2 

The fact that the prolongation of production processes 
leads to surplus results, and the fact that these surplus results 

1 Inventions, so-called, generally mean the discovery of a new and more 
productive method of production. Frequently — probably in most cases — the 
new way is longer than the old, and in this case to utilise the invention requires 
the making of a great number of intermediate products, or, as it is usually 
expressed, a large investment of capital : e.g. in machinery, building of railways, 
and the like. But often a happy invention may lead to a better, and at the 
same time shorter, way of production, such as the manufacture of certain dye- 
stuffs from chemical instead of plant bodies. However elaborate the former 
may be, it is still certainly far more direct and speedy than a manufacture which 
has to wait on tedious processes of growth. 

2 It may be asked here, by way of objection, why man does not fully utilise 
the chances offered him of increasing the technical result by the technical know- 
ledge he has at the moment. The common explanation runs — from want of 
capital. With the limited amount of capital at his disposal man can only utilise 
those chances of employment, among the infinite number of remunerative ones, 
which are most remunerative, and a great number of less, but still remunerative, 
employments must be passed over. This explanation is not quite exact, but 
it is at least right in the main contention. We may therefore be content 
with it until, in another connection, we can examine the matter with perfect 

chap, ii THUNEN'S LA IV 87 

usually decrease from a certain point onwards, have long 
been noticed and acknowledged in our science ; mostly, I must 
say, in another form, and one borrowed from the jargon of the 
Productivity Theory. It is many years since Thiinen put 
them in the most impartial manner, and showed that, in 
the case of progressive increase of capital, the capital that 
comes last does lead to an increase in the product of labour, 
but in a constantly decreasing proportion. 1 On this founda- 
tion of fact he himself framed the well-known doctrine that 
the rate of interest adjusts itself to the productiveness of the 
last dose of capital applied in the least productive employment, 
and, in the wake of this doctrine, the facts were recognised and 
received in the widest circles. 2 In harmony, however, with 
the fashion of the time, these facts were forced into the special 
forms of presentation and terminology of the Productivity 
Theory, whereby the most vexatious mistakes and confusions 
slipped in along with them. 3 Lefore going further it seemed to 
me advisable here to try to restate the facts in their naked 

It scarcely, perhaps, requires to be proved that the capital- 
ist production of consumption goods, although carried out in 
roundabout ways and by many stages, does not, on that 
account, cease to exhibit an intimately connected and united 
work of production. The labour which produces the inter- 
mediate products — the mediate labour, as we shall call it with 
Podbertus 4 — and the labour which, out of and with the inter- 
mediate products, produces the desired good — the immediate 
labour — both form a part of the production of the consumption 
good. The production of timber is more than the labour of 

1 Der isolirte Staat, third edition, part ii. div. i. p. 97. See particularly 
the table on p. 101. 

8 For instance by Roscher, Orundlagen, § 183 ; by Mangoldt, Volkswirth- 
schaftslehre, 1868, p. 432 ; by Mithoff in Schbnberg's Handbuch, second edition, 
p. 663, and by many others. Jevons independently adopted quite similar views, 
Theory of Political Economy, second edition, p. 277. 

3 In particular the "physical" or "technical productivity," which is founded 
on these facts (that is, the circumstance that by the assistance of capital more 
products can be produced than without it), was confused with a "value pro- 
ductivity " (that is, a pretended power of capital to produce more value than it 
itself possesses). See my Capital and Interest, pp. 112, 131. 

4 Das Kapital, p. 236. 


felling wood in the forest ; it embraces the labour of the smith 
who makes the axe, of the carpenter who cuts the haft, of the 
miner who raises the ore, of the iron workers and steel workers 
who prepare it, and so on. True, our modern division of 
employment to outward appearance breaks up the unity of the 
process into a number of independent parts, but it is the 
theorist's business to understand economic processes in their 
living connection, and he dare not, of course, let himself be 
deceived by appearances, but must reproduce in his own mind 
the real unity of the work of production thus obscured. The 
masterly manner in which Eodbertus has done this is one of 
his best services to economics. 

But this very consideration, essentially economic as it 
is, raises a doubt we must fairly meet. According to what 
has been said, the production period of a consumption good 
is, strictly speaking, to be reckoned from the moment on 
which the first hand was laid to the making of its first inter- 
mediate product, right down to the completion of the good 
itself. In our times, when unassisted production has almost 
entirely disappeared, and one generation builds on the inter- 
mediate products laid down by earlier generations, the produc- 
tion period of almost any consumption good could, in any strict 
calculation, trace its beginning back to early centuries. 

The boy who cuts a stick with his knife is, strictly speak- 
ing, only continuing the work of the miner who, centuries ago, 
thrnst the first spade into the ground to sink the shaft from 
which the ore was brought to make the blade. Of course the 
finished product of to-day owes a quite infinitesimal fraction — 
not worth calculation even if that were possible — to the firstlings 
of labour in these far-off centuries, and it would therefore give 
a very false view of the degree of capitalism expended in the 
cutting of the stick, if we were to estimate it by the absolute 
period of time intervening between the atom of labour first put 
forth and the completion of the work. 

It is more important and more correct to look at the 
period of time which elapses on the average between the 
expenditure of the original productive powers, labour and 
uses of land, as successively emp oyed in any work, and the 
turning out of the finished consumption goods. Production is 
more or less capitalistic according to the average remoteness of 


the period at which the original productive powers exerted 
during the process are paid. Say, for example, that the pro- 
duction of a commodity costs in all a hundred days of labour 
— for the sake of simplification we shall leave out the co-oper- 
ating uses of land — and that, of these hundred, one day was 
expended ten years before the completion of the work, another 
nine years, others respectively eight, seven, six, five, four, three, 
two, and one year, while the remaining ninety days were 
expended immediately before the completion. Then the first 
day of labour is paid ten years later, the second nine years 
later, the third eight years later, and so on, while the last 
ninety days are paid immediately. The calculation is as 
follows : — 

— ioo "Too" 

That is to say, on the average the hundred days of labour are 
paid in about half a year. Say that the production of another 
good were also to demand in all a hundred days of labour, 
likewise spent in the course of a ten years' period, but spread 
over it in such a way that twenty days' work was expended 
ten years before, other twenty days' work nine years before, 
five days' work in each year from the eighth to the first 
successively, while the last twenty days were spent immediately 
before the completion of the work, the average would come out 
quite differently and much higher : — 

200 + 180 + 40 + 35 + 30 f 25 + 20 + 15 + 10 + 5 _ 560 

ioo ~ioo' 

or xnore than five and a half years. It is highly probable, 
moreover, that in both cases some fraction of a day's work will 
have been spent centuries before, but such a small element 
will scarcely influence the average, and may in most cases be 
simply neglected. 1 

1 The first of the above schemes corresponds to the case of a production 
where one single tool is employed, and where the total process extends over ten 
years — for instance, the making and using of an axe of Bessemer steel. The 
second scheme, again, corresponds to a production where, besides the axe, a 
number of other capitalistic tools, auxiliary mechanism, and materials, are 
employed, the existence of which, however, does not date from farther back than 
ten years. This comparison clearly shows how, without increasing the absolute 
length of the production period, the degree of capitalism may be very considerably 


Where I have spoken above of extension or prolongation 
of the roundabout process of production, and of degrees of 
capitalism, I must be understood in the sense just explained. 
The length or the shortness of the process, its extension or its 
curtailment, is not to be measured by the absolute duration of 
the period that lies between the expenditure of the first atom 
of labour and the last — otherwise the cracking of nuts with a 
hammer which might chance to be made of iron brought from 
a mine opened by the Romans would perhaps be the most 
" capitalistic " kind of production. Nor is it to be measured 
by the number of independent intermediate members which 
the production process embraces — otherwise when, by means 
of the three intermediate products, twig, lime, and bird-lime, 
a boy catches birds on the same day as he commences making 
these three forms of capital, his bird-catching would be more 
capitalistic than the far-back labour of the miner who devotes 
years to the sinking of a shaft. But it is to be measured by 
the average period which lies between the successive expendi- 
ture in labour and uses of land and the obtaining of the final 
good. It is only in methods' of production where the expendi- 
ture in original powers is distributed equally over the whole 
production period that the absolute length of the process 
affords at the same time the proper measure for the degree of 
capitalism. 1 

Let us now apply what has been said of single acts of pro- 
duction to the circumstances of an entire community. Every 
year a community conies anew into possession, and gets the 
disposal of a certain quantum of original productive powers, 
the powers represented by its labour and land. The farther 
away its production is from capitalist production — there is no 
production, of course, absolutely without capital — the greater 

increased ; all that is necessary is to alter the proportion between the number 
of early workers and that of the finishing ones. Whether it is ten workers 
employed in the final stage against one worker employed ten years before, or one 
worker in the final stage against ten workers ten years before, in either case the 
total production process extends over a period of ten years. But in the former 
case the finishing workers would be very sparingly provided with tools, machines, 
etc. ; in the latter case they would be very amply provided. The latter, of 
course, would be far and away the more capitalistic of the two. 

1 See the interesting calculation and graphic statement of the amount of 
investment of capital in Jevons's Theory of Political Economy, second edition, 
p. 249. 

chap, ii SUMMARY 91 

will be the proportion of the year's productive powers that is 
changed into consumption goods during the same year. The 
more capitalistic the production is, the smaller will be the 
proportion of the year's productive powers consumed within 
the year, and the greater the proportion invested in inter- 
mediate products that will come to maturity as finished goods 
only in future years. And again, the higher the degree of 
capitalism is, the more remote will be the period at which 
these intermediate products mature. Thus a community pro- 
ducing from hand to mouth consumes in each year the fruits 
of the productive powers of that same year. A capitalist 
community consumes only to a small extent the fruits of 
productive powers of the present year, and to a great extent 
the fruits of the productive powers of past years, while it 
again is making intermediate products for the service of 
future years. And the higher the degree of capitalism, the 
farther back in the past, on the average, are the years 
whose productive powers it consumes, and the farther on in 
the future are the periods for which it provides 

And now, I trust, the following proposition, which puts 
together the chief features of the capitalist production process, 
will be understood beyond possibility of mistake. 

All consumption goods which uian produces come into 
existence through a co-operation of human power with natural 
powers, which latter are partly economic, partly free. By 
means of these primary productive powers man may make the 
consumption goods he desires, either immediately, or through 
the medium of intermediate products called Capital. The latter 
method demands a sacrifice of time, but it has an advantage in 
the quantity of product, and this advantage, although perhaps 
in decreasing ratio, is associated with every prolongation of the 
roundabout way of production. 




After what has been said in the preceding chapter it should 
not be difficult accurately to indicate the role which capital 
plays in economic production. 

Capital has, first, a symptomatic importance. Its presence 
is always the symptom of a profitable roundabout production. 
I say, deliberately, "symptom" and not " cause " or " condition " 
of profitable methods of production ; for, as a fact, its presence 
is rather the result than the cause. If men to-day are fishing 
with boats and nets instead of picking the fish out of pools on 
the shore with their hands, it cannot be said that they have 
adopted those more fruitful methods because they possess boats 
and nets. Obviously they possess boats and nets because they 
have adopted these methods. They must have already chosen 
the roundabout way of production before these goods, speaking 
generally, come into existence. 1 

This, however, does not exhaust the importance of capital. 
It is, secondly, — and herein lies the chief point of its productive 
efficiency, — an effective intermediate cause of the consummation 
of this profitable roundabout process. Every piece of capital 
is, to a certain extent, a store of useful natural powers, the 
working of which helps to bring to a successful issue the 
roundabout process in the course of which the piece of capital 
has come into existence. I say " intermediate cause," not 

1 It would be somewhat different if we were to adopt the other conception of 
capital, and understand by it, not intermediate products only, but the entire 
national subsistence fund, which would therefore include the labourers' subsist- 
ence. In that case, but only in that case, one might say that capital was the 
cause of these profitable roundabout ways of production being adopted. 

chap, in AS TOOL AND CA USE 93 

" cause." Capital gives no independent impulse ; it only 
transmits an impulse given by the original productive powers, 
just as one billiard ball transmits motion to another. The 
function of capital, indeed, has been called the " prisoning of 
natural powers." The expression is quite appropriate, and 
very happy. Only it must never be forgotten that this 
attribute belongs to the entire capitalist process, not only to 
the "descending branch," generally called the use of the capital, 
but also to the "ascending branch," in which -the capital itself is 
first made. Man does not first prison natural powers by 
means of capital ; capital itself originates as the result of a 
previous imprisonment — by the original productive powers 
that are at man's own bidding — of certain compliant natural 
powers. Taken all in all, among the many predicates which 
economists have given to capital, the one that best fits this 
aspect of the case is that of " Tool of Production." 

But, thirdly, capital is also the indirect cause of other 
profitable roundabout ways of production being entered on — 
other, that is, than those in the course of which it itself has 
come into existence. When a people possesses much capital 
not only can it successfully complete those processes in the 
course of which the capital presently existing has come into 
beiog, but it can also adopt other and new methods. For the 
stock of capital in hand (which, essentially, is nothing else 
than an aggregate of consumption goods in a transition state *) 
throws off every year a certain quantity of its constituents, 
which have just completed their transition state and become 
finished goods, and places them at the disposal of the current 
economic period for purposes of immediate consumption. In 
this way the greater the stock of capital, the larger is the 
share taken by the productive powers of the past in providing 
means of consumption for the present, and the less are the 
new productive powers of the present drawn on for the present. 
Thus a larger proportion of these current powers is free for 
the service of the future, that is, for investment in more or 
less far-reaching processes of production. 

If a community is so poor that the consumption goods 

1 Schaffle very finely speaks of capital as " Consumption wealth as it were in 
the stalk, when it is still only swelling bud and ripening fruit (Sehonberg's 
Handbiich, second edition, vol, i. p. 208). 


maturing out of capitalist intermediate products in any year, 
say in 1888, scarcely cover -^ of that year's wants, then the 
remaining A|j must be provided out of the labour and uses of 
land of 1888, and only a fractional part of the productive 
powers of that year remains over to initiate methods of pro- 
duction that will turn out consumption goods in the years 
following. If, on the other hand, the past has accumu- 
lated a treasure of intermediate products — raw materials, 
tools, machines, factories, workshops, etc. — so great that their 
successive maturing covers the consumption demand of the 
year 1888 to the extent of ^, that of 1889 to the extent of 
^j, that of 1890 to the extent of ^, and so on, then only 
one half of the productive powers of 1888 will be claimed to 
make up the current wants, while the entire other half may 
be spent unhesitatingly in producing intermediate products 
which will come to maturity, as consumption goods, only in later 
years — all the later in proportion as the next year's wants 
are already covered by accumulations of capital in the past. 

In this sense, but only in this sense, is it correct to say 
that man must already have capital before he can enter on 
roundabout ways of production ; that want of capital prevents 
man taking advantage of far-reaching and profitable methods of 
production, such as the laying of railways, building of canals, 
irrigation schemes, altering of river-beds, and so on. It would 
be quite incorrect to understand this proposition as meaning 
that a community must have, finished and ready to hand, that- 
kind of concrete capital with which the methods of production 
in question are carried out, or even the concrete capital (raw 
materials, tools, etc.) out of which are made the forms of 
capital first needed. All that is required is, that the com- 
munity possess so much capital, whatever its shape, as will 
cover — while it is being gradually changed into consumption 
goods — the demand of the present and near future for such 
goods sufficiently to leave the current production powers free 
for investment in intermediate products of the kind required. 
It would be essentially more correct to say that we require 
consumption goods before we can enter upon roundabout ways 
of production, whether these be in the form of finished stocks 
of goods ready for consumption, or in the transition form of 
intermediate products. 


Lastly, we can now answer, easily and categorically, the 
much-disputed question, whether any independent productive 
power is inherent in capital ; or, to put the question in its 
usual form, whether capital is a third and independent " factor 
in production " alongside of labour and nature ? 

The answer must be a most distinct negative. This seems 
to me the only conclusion any one can come to, provided he 
makes clear to himself the sense in which this question is put, 
and must be put if it is worth the trouble of putting at all. 
And this sense is a very emphatic one. The following 
analogy will make it perfectly clear. A man throws a stone 
at another man and kills him. Has the stone killed the 
man ? If the question is put without laying any special 
emphasis it may be answered without hesitation in the 
affirmative. But how if the murderer, on his trial, were to 
defend himself by saying that it was not he but the stone that 
had killed the man ? Taking the words in this sense should 
we still say that the stone had killed the man, and acquit the 
murderer ? 

Now it is with an emphasis like this that economists 
inquire as to the independent productivity of capital. The 
question comes up in the course of the inquiry concerning 
the elements which constitute our material goods. A similar 
interest to that which the chemist has in the analysis of com- 
pound bodies leads the economist to analyse the multiform 
transition stages of material goods, to trace them back to 
their source, and to resolve the thousandfold instruments and 
auxiliaries of production, to which, directly or indirectly, they 
owe their existence, into the simple fundamental powers from 
the co-operation of which everything proceeds. In this con- 
nection the doubt arises whether capital is an independent 
productive power or not. The whole spirit of the inquiry 
allows only one meaning to be given to the question, and the 
emphasis is very marked. We are not asking about dependent 
intermediate causes, but about ultimate independent elements. 
The question is not whether capital plays a part in the bring- 
ing about of a productive result — such as the stone does in 
the killing of the man — but whether, granted the productive 
result, some part of it is due to capital so entirely and pecu- 
liarly that it simply cannot be put to the credit of the two 


other recognised elementary factors, nature and labour. Now 
can this question be answered in the affirmative ? 

Emphatically it can not. Capital is an intermediate 
product of nature and labour, nothing more. Its own origin, 
its existence, its subsequent action, are nothing but stages in 
the continuous working of the true elements, nature and 
labour. They and they alone do everything from beginning 
to end in bringing consumption goods into existence. The 
only distinction is that sometimes they do it all at once, 
sometimes by several stages. In the latter case the completion 
of each stage is marked outwardly by the appearance of a 
fore-product or intermediate product, and capital has emerged. 
But, let me ask, is a thing any the less the work of its author 
that it is not produced all at once, but in instalments ? If 
to-day, by allying my labour with natural powers, I make 
bricks out of clay, and to-morrow, by allying my labour with 
natural gifts, I obtain lime, and the day after that make 
mortar and so construct a wall, can it be said of any part of 
the wall that I and the natural powers have not made it ? 
Again, before a lengthy piece of work, such as the building of 
a house, is quite finished, it naturally must be at one time 
a fourth finished, then a half finished, then three-quarters 
finished. What now would be said if one were to describe 
these inevitable stages of the work as independent requisites 
of house-building, and maintain that, for the building of a 
house, we require, besides building materials and labour, a 
quarter-finished house, a half-finished house, a three-quarters- 
finished house ? In form perhaps it is less striking, but in 
effect it is not a whit more correct, to elevate those inter- 
mediate steps in the progress of the work, which outwardly 
take the shape of capital, into an independent agent of 
production by the side of nature and labour. 

This would never have been called in question had it not 
been that the introduction of division of vocations and labour 
had split up the united work of producing consumption goods 
into a number of apparently independent acts of production. 
It was this that made economists forget to look at it as a 
whole, and made them, with singular modesty, bow before 
the dependent intermediate creations of provious human 
activity as if they represented an independent power. But 


even as it was, it was scarcely possible for any acute theorist 
to make this confusion if another circumstance had not 
conspired to assist it. That was the accepted parallelism 
between factors of production and branches of income, and 
the awkwardness economists feared to encounter in the 
explanation and justification of interest if they had to 
refuse recognition to capital as an independent factor of 
production. All natural income, it was taught, is based on 
participation in the production of goods. The various branches 
of income are nothing else than the forms in which the 
different contributories to production are paid, Eent of land, 
is the payment for the factor of nature, wage the payment for 
the factor of labour, and interest — well, interest appeared to 
have no substantial foundation if it also could not be inter- 
preted as a payment for a third independent factor of produc- 
tion. It did not seem to be explained theoretically, nor — 
what indeed might be more serious to the theorists in question 
— to be justified practically. Thus it was that many a learned 
thinker was driven into a corner, and preferred rather to shut 
an eye to clear facts than to sacrifice the independent pro- 
ductivity of capital, and with it the welcome basis for the 
current theory of interest. 

Facts certainly spoke with perfect distinctness. It was 
impossible to deny that capital is no element in the proper 
sense of the word, inasmuch as it itself springs from the 
co-operation of nature and labour. Not only so, but by a 
singular irony of fate this had to be expressly proved — as it 
had been by Adam Smith before them — by those very theorists 
who maintained its independent productivity. In their theory 
of price, in having to show how all prices resolve themselves 
finally into rent, wage, and interest, they were forced tc 
demonstrate in the most minute way that concrete capital is 
not an element ; that, for instance, copper and steel, which 
serve as capital in the manufacture of watches, originate in the 
co-operation of the natural mineral deposits, of the work of 
miners, and of older capitals, which themselves have originated 
in similar ways, and so on. 1 In the face of this, to maintain 
the independent productivity of what they had just demor- 
strated to be a dependent and intermediate product, they were 

1 e.g. Say, Traitt, seventh edition, p. 344. 


driven to adopt very singular expedients. The favourite ones 
were obscurity and brevity. Instead of making an earnest 
effort to bridge the yawning contradiction, they either did not 
suggest the doubt at all, or, if a doubt had already been raised, 
they dismissed it with some laconic phrase or other. A long 
series of writers make no scruple about expounding capital on 
one page as a factor of production " derived " from nature and 
labour, and on the next as a third independent factor of 
production along with nature and labour. 1 Mill has so far 
yielded to the pressure of facts as to admit that capital is 
itself the product of labour, and that its instrumentality in 
production is therefore in reality that of labour in an indirect 
shape. But with a quick turn he saves its independence. 
" Not the less," he continues, " does it require to be specified 
separately. A 'previous application of labour to produce the 
capital required for consumption during the work is no less 
essential than the application of labour to the work, itself." 2 
Therefore, because labour must be applied twice, in two 
different stages of production, something else besides labour 
must be recognised as the independent condition of production ! 
Some writers, of course, treat the matter more seriously. 
They do not evade the difficulty, but try to get a real solution 
of it. They cannot overlook the fact that capital first comes 
into existence through combination of simpler factors. Quite 
correctly, therefore, they do not attempt to claim for capital 
itself the character of an element ; but they still require an 
independent support for interest. This they obtain by resolv- 
ing capital into its elements, and finding that, besides nature 
and labour, there is still a third independent element : Senior 
calls it Abstinence, Hermann calls it the Use of Capital. These 
attempts at solution, which I went into in detail and 
pronounced upon in my former book, Capital and Interest, 
were certainly not very happy. Hermann's, in particular, is 
singularly unfortunate in being obliged to explain the " use " 
which capital gives as more elementary than capital itself — as 
if the egg which the hen lays is antecedent to the hen ! 

1 Of older writers, e.g. B. Fulda, Grundsatze der Oek. pol. or Kameralwissen- 
schaften, second edition, 1820, p. 135 ; Schon, Neue Untersuchung der National- 
Oekonomie, 1835, p. 47. Of later writers Cossa - himself, Elementi, eighth 
edition, p. 34 ; and Gide, Principes d'£c. Pol. 1884, pp. 101, 145. 

2 Book i. chap. vii. § i. 


Nevertheless as regards our present question these theories are 
very instructive. They show that several of our most clear- 
sighted thinkers preferred to take refuge in the most hazardous 
and artificial constructions rather than agree in the current 
doctrine that capital itself, while originating in the co-operation 
of nature and labour, is, all the same, an " independent " factor 
of production along with them ! 

We may confidently, then, strike capital out of the list of 
independent productive powers, as a portion of the English 
school did long ago, and as the Socialists have done more 
recently. I may say, however, that the manner in which they 
have done so is not quite appropriate. In the instrumentality 
of capital they see only the instrumentality of the labour 
expended in producing it ; they explain it as " previous stored- 
up labour." This is not correct. Capital — to keep the same 
form of expression — is " stored-up labour," but it is something 
more ; it is also stored-up valuable natural power. It is the 
medium through which the two original productive powers exert 
their instrumentality. To the instrumentality of gold, which 
is employed as capital in gilding the lightning-rod, the labour 
of the miner, who finds the ore and refines it, is not the 
only contributory : nature also has contributed her share in 
depositing the valuable vein or placer. 

Although, then, we have traced its instrumentality in pro- 
duction to nature and labour, is capital itself not productive at 
all ? Certainly it is, in more than one sense of that too ambiguous 
word. 1 It is, first, " productive " because it finds its destina- 
tion in the production of goods ; it is, further, productive 
because it is an effectual tool in completing the roundabout 
and profitable methods of production once they are entered on ; 
finally, it is productive indirectly because it makes the adoption 
of new and profitable methods possible. One thing, however, 
it is not ; it is not independently productive in the sense on 
which the most important part of the controversy turns. As 
the old economist Lotz expressed it, briefly and succinctly : 
" Of any independent labour in capital there is simply no 
question." 2 

1 See Capital and Interest, p. 114. 
2 Handbuch der Staatswirthschaftslehre, Erlangen, 1821, i. p. 66, in note. 




In our science there are three views in circulation as to the 
formation of capital. One finds its origin in Saving, a second 
in Production, and a third in both together. Of these the 
third enjoys the widest acceptance, and it is also the correct 
one. But the formula will have to be amplified to some 
extent, and presented in a way that is, at once, clearer and 
more true to life than has usually been the case. 1 

1 The dispute as to the share which Saving plays in the formation of capital 
is almost as old as economic science. The theory which ascribed it the prominent 
place was the first to appear. Already suggested by the 1 Physiocrats, it was 
formulated by Adam Smith in the often-quoted proposition, " Parsimony and not 
industry is the immediate cause of the increase of capital" ( Wealth of Nations, 
book ii. chap, iii.) Supported by his authority it was for a long time almost 
the only one that held the field, and, although in later times it has suffered many 
reverses, it still finds some notable apostles: thus, among others, Mill — " Capital 
is the result of saving " (book i. chap. v. § 4) ; Roscher — " Capital is mainly the 
result of saving " {Grundlagen, § 45) ; Francis Walker — " It arises solely out of 
saving. It stands always for self-denial and abstinence " {Political Economy, 
p. 67). But from a very early period there was sharp opposition to the theory, 
first from Lauderdale {Inquiry, 1804, chap, iv.) ; then, after some time, from 
the socialist theorists, Rodbertus {Das Kapital, pp. 240, 267 — "Just as the 
capital of the isolated individual originates and increases, so does the national 
capital, — only through labour and not through saving ") ; Lassalle {Kapital und 
Arbeit, p. 64) ; Marx {Das Kapital, i. second edition, p. 619). To these opinions 
a great many recent writers of other schools more or less incline ; thus, very 
clearly and decidedly, Gide {Principcs, p. 167) ; less decidedly, Klein wachter (in 
Schonberg's Handbuch, second edition, p. 213), and R. Meyer {Das Wesen des 
Einkommens, 1887, p. 213) ; more by way of reconciliation, Wagner {Grundle- 
gung, second edition, § 298) ; and, a little obscurely and confusedly, Colin 
{Grundlegung, 1885, § 257). Although, however, this tendency to ascribe capital 
to labour is unmistakably rapidly gaining ground, that view which ascribes to 
saving a share in the formation of capital is still the view of the majority. But 
the later representatives of this view are in the habit of rightly limiting it, and 


To put the matter, first of all, in its simplest conceivable 
terms. Suppose a recluse working absolutely without capital 
— say some Eobinson Crusoe thrown on a lonely shore without 
either tools or weapons. Being without capital he must at 
first support life in the most primitive fashion, as, for instance, 
by gathering berries which grow wild. Now what must happen 
before he can get possession of his first capital, say a bow and 
arrow ? 

Let us put the first theory to the test. Is saving by 
itself sufficient to call capital into existence ? Certainly not. 
With the one possession that he has — his wild fruits — our 
Crusoe may save and stint as much as he please ; he will 
accumulate a store of berries — goods for consumption — but 
that will never give him a single bow or arrow. As we can 
easily see, these must be positively produced. 

Is it sufficient, then, for the origination of capital that it 
be produced ? Again, certainly not. Of course, once Crusoe 
has got the length of commencing to produce capital, the 
formation of capital is as good as accomplished. But before 
he gets that length, there is something else to be done, and 
that something is by no means self-evident. Productive 
powers are to be set free for the proposed formation of capital, 
and this can only be done, as we shall see, through saving. 

The amount of original productive powers which our 
Crusoe has daily at his command is equivalent — leaving 
natural gifts out of account — to one day's labour, which we 
shall assume to be ten hours of labour. Suppose, now, that 
the berries within reach of his hut are so scarce that a full 
day's labour of ten hours is necessary to provide as much food 
as will just support him in bare life, obviously no formation of 
capital is possible. There is no use advising him to produce 
a bow and arrows. Producing requires time and strength, 
and all the time and strength our Crusoe has is fully claimed 

expressly emphasising the fact that saving alone is not sufficient, and that there 
must also be "labour," or "devotion to productive purposes," or such like — 
which, indeed, may very well have been the true meaning of many of the older 
adherents of the Saving theory, and only not expressed by them because of its 
assumed obviousness. See, e.g., Rau (Volkswirthschaftslchre, eighth edition, i. 
§ 133), Ricca-Salerno {Sulla Teoria del Capitale, chap. iv. p. 118 — "II capitale 
deve la sua origine all' industria e al risparmio "), Cossa {Elementi, eighth 
edition, p. 39), and many others. 


already to keep him in life. To produce capital, then, may be 
difficult enough without something else ; and what that is will 
appear immediately on our varying a little the assumed facts 
of the illustration. 

Suppose there is such wealth of berries that the result 
of nine hours' gathering is sufficient to support bare life, while 
ten hours' gathering gives a return such as to guarantee a 
subsistence amply sufficient to maintain Crusoe in health and 
strength. Obviously he has now a choice between two lines 
of conduct. Either he may take advantage of the opportunity 
thus offered to complete his provision, and consume each day 
the fruits of an entire ten hours' day of labour — in which case 
it is perfectly clear that he has now no time and strength left 
to make a bow and arrows ; or, although the productive power 
at his disposal would enable him to live better, he may content 
himself with the barest living, which, as we said, can be 
provided by the nine hours' labour of gathering ; then, and 
then only, has he a tenth hour free in which to make weapons 
for future use. This amounts to saying, in other words, that, 
before capital can actually be formed, the productive powers 
necessary to its making must be saved by encroaching on the 
moment's enjoyment. 

To anticipate and avoid a mistake very apt to be made, it 
must be said distinctly that this encroaching on the moment's 
enjoyment need by no means involve downright privation. 
With more productive labour, Crusoe's choice would not lie, as 
in the above illustration, between bare living and comfortable 
living, but, perhaps, between comfortable and ample living. It 
is not a question of the absolute insignificance of these claims 
on the moment's enjoyment, but on their relation to that 
amount which I may indicate in the shortest and most 
generally intelligible way by the word " Income " — an expres- 
sion, unfortunately* not yet strictly enough defined in scientific 
usage. 1 The essential thing is that the current endowment of 

1 On the many divergent and contradictory readings of the conception of 
Income, see R. Meyer's Das Wesen des Einkommens, 1887, particularly pp. 1-27. 
I purposely avoid going into the controversy as to this conception, which Meyer's 
work, notwithstanding its many merits, seems to me to have by no means 
adequately settled. Where I use the word Income in the sequel it is to be 
understood, not in Meyer's sense, but in a sense very much in agreement with 
popular usage. 


productive powers should not be entirely claimed for the 
immediate consumption of the current period, but that a 
portion of this endowment should be retained for the service 
of a future period. But such a retention will undoubtedly be 
called a real saving of productive powers. 

A saving of productive powers, be it noted ; for productive 
powers, and not the goods which constitute capital, are the 
immediate object of saving. This is an important point, 
which must be strongly emphasised because, in the current 
view, too little consideration is given to it. Man saves 
consumption goods, his means of enjoyment ; he thus saves 
productive powers, and with these finally he can produce 
capital. 1 It is only exceptionally that capital itself is the 
immediate object of saving ; it may happen in the case of those 
goods which, by nature, admit of being used either for con- 
sumption or for production, such as grain. To the extent 
that a man withdraws such goods from immediate use in 
consumption, his saving directly lays the foundation of capital. 
To build on that foundation, of course, the negative element of 
saving must have added to it the positive element of devoting 
the saved goods to production, as intermediate products. 

It is easy to show that every further increase of the 
existing stock of capital is limited by the same conditions as 
the first formation. Assume that for a month our Crusoe 
consumes daily only so much fruit as he can gather in nine 
hours' labour, and devotes the tenth hour to making weapons. 
As result of this thirty hours' work he now owns a bow and 
arrows, and in them he has the possibility of making his 
living much more easily and amply than before. Naturally 
his desires widen. He wishes decent clothes, a house, all sorts 
of things that minister to comfort. But for these he requires 
the suitable intermediate products — axes, nails, braces, etc. 
Now we ask further what kind of conditions must be fulfilled 
that Crusoe may obtain this new capital ? 

This is very easily answered. If he makes use of the 
improved circumstances, which he owes to the possession of 

1 Adam Smith's celebrated proposition therefore — "Parsimony and not 
industry is the immediate cause of the increase of capital " — is, strictly speaking, 
to be turned just the other way about. The immediate cause of the origin of 
capital is production ; the mediate cause is a previous saving. 


the bow and arrows, simply to increase his immediate con- 
sumption — that is, if he spends the whole labour time at his 
disposal. in the service of the moment, hunting, gathering fruits, 
and sleeping, — not only is it impossible for him to acquire new 
capital, but he will lose the old. Bows and arrows do not 
last for ever. In a month's time, we shall say, his arrows will 
be spent, and his bow worn out. If, therefore, his capital is 
to remain in existence, he must, obviously, employ at least one 
of the ten hours in renewing his weapons, and, at the most, he 
can employ nine only in gathering and hunting. 

To put it in propositional form. To retain capital in 
existence, man must make over, and devote to the service of 
the future, at least so much of the productive powers of the 
current period as he has consumed, during the current period, 
of the produce of former productive powers. 1 Or, to put it 
in other words, the consumption of the current period is 
limited by the produce of as many productive powers — present 
and past taken together — as come into existence anew during 
the current period. 

Finally, if an increase of capital is to become possible, 
obviously a still greater proportion of the current productive 
powers must be withdrawn from the consumption of the 
present, and transferred to the service of the future ; of his 
ten hours of labour our Crusoe must devote one to renewing 
his weapons, and less than nvn& to gathering berries and killing 
game, if he is to make the new capital he desires in what 
remains free of his labour time. To put it generally, he must 
curtail the immediate consumption of the current period to 
such a point, that it uses up the produce of fewer (past and 
present) productive powers than come into existence anew in 
the same period ; he must, in a word, save productive powers. 

All this is quite clear and simple ; indeed it is even a 
little too simple for our purpose. Robinsonades and pictures 

1 It is only in cases where, in the meanwhile, the technique of the particular 
production has improved, that the transference of a less amount of productive 
powers to the service of the future is sufficient. If, for instance, Crusoe learns 
how to make in fifteen days those weapons which formerly had taken thirty 
days, it is, of course, sufficient for the upkeep of the capital if he works only half 
an hour daily at the repair of his weapons, and nine and a half hours can ** 
be spent in directly obtaining a more plentiful maintenance without prejudic to 
his economical position. 


of primitive circumstances are very good when the object is to 
present clearly the simplest typical principles — to give a kind 
of skeleton of economical procedure, — and to that extent, I 
trust, our Robinsonade also has done good service. But, 
naturally, they cannot give us an adequate picture of those 
peculiar and developed forms in which this skeleton clothes 
itself in the living actuality of a modern economic community. 
And it is just at this point that it becomes important to fill 
out the abstract formula with explanation and illustration 
taken from life. We shall, therefore, leave the lonely shore 
of our Crusoe, and come to the industrial conduct of a great 
nation with its millions of people. 




Let us take the case of a community embracing ten millions 
of able-bodied persons. Leaving out of account the current 
uses of land, so as not to cumber the statement unnecessarily, 
the annual endowment of such a nation — its original productive 
powers — thus amounts to ten million years of labour. Its 
accumulated stock of capital, we shall suppose, represents the 
fruit of thirty million labour -years (and a corresponding 
amount of uses of land) invested during previous economic 
years in intermediate products. Now look at the constitution 
of this stock of capital more closely. 

Every capital is, by its nature, composed of a mass of inter- 
mediate products, and the common goal of all these products 
is to ripen into consumption goods or means of enjoyment. 
They reach this goal through the continuation of that produc- 
tion process in the course of which they themselves have come 
into existence. They are all, as it were, on the way towards 
the goal of human consumption. But the length of the 
road which they have had to travel is different. This is 
partly because the various branches of production adopt round- 
about ways of various length : mining, for instance, or railway 
building, takes a much more roundabout and lengthy method 
than wood-cutting. But it is partly, also, because those goods 
which constitute the community's capital at the moment are at 
various points on their respective roads. Many an inter- 
mediate product has just entered on a very lengthy roundabout 
road, as, for instance, a boring machine, whose life-work it 
will be to drive a gallery in a mine. Some are midway. 
Others, again, like clothing stuffs ready for making into coats 


and mantles, are near the end of the journey their particular 
production process has to take. Now the inventory of capital 
lays a kind of cross-section through the production processes, 
thus unlike in length and unlike in stage of progress, and 
intersects them, of course, at the most different points, just 
as a national census lays a section through the paths of life, 
and encounters and registers the individual members of the 
nation at the most different stages of life. 

Considered with reference to the varying distances at 
which intermediate products lie from the goal of consumption, 
the total mass of capital divides itself into a number of annual 
classes or stages of maturity, which may be very appropriately 
pictured by a diagram of concentric annual circles. The out- 
most circle (Fig. 1) embraces those goods which will be trans 
formed into goods ready for consumption within the coming 
year ; the second circle represents those goods which will 
ripen into consumption goods in the year after; the third 
circle, those which will be ready the year after that, and so on. 
In a community where production is not yet strongly capital- 
istic, the inner circles will rapidly contract (Fig. 2), because, 
in such a community, very lengthy roundabout ways of pro- 
duction, such as turn out their finished goods only after many 
years, will be rare. In rich and well-developed communities, 
again, there will be a considerable number of comprehensive 
circles, and of these the inner ones will have a content that, 
although relatively smaller, is not inconsiderable. 

This representation of the stages of maturity by concentric 
circles is peculiarly appropriate on this account that it also 
gives a very happy expression to the quantitative relations of 
these stages. Exactly as the outmost of the concentric circles 
possesses the greatest area, while the inner circles possess a 
gradually decreasing one, does the first of these classes — that 
nearest to the completion of the process — always, by its very 
nature, embrace the largest quota of the total mass of capital, 
while a decreasingly smaller quota falls to the more remote 
classes. There are two reasons for this. The first is that 
the various branches of production generally adopt processes 
of different lengths — lengths varying with the technical cir- 
cumstances of each branch. Many complete the entire work 
of production, from the preliminary processes to the turning 


out of the finished product, within a year ; many require two, 
three, and five years; only a few have a production period 
extending over ten, twenty, and thirty years. The result is 
that in the highest classes — those farthest removed in time 
from the finished product — only a few branches of produc- 
tion are found; intermediate products, for instance, in 
the tenth circle can only be provided by those branches of 
production which have at least a ten years' production period. 
But the lower circles are filled, not only by those last-named 
branches of production (for the intermediate products of these 
very long processes must pass circle by circle towards maturity), 
but also by those branches of production which have shorter 
periods. Thus the quantity of intermediate products grows 
larger and larger up to the first class, and to this first class 
every branch of production, without exception, sends its 

But there is still another circumstance that works in the 
same direction. The ripening of intermediate products into 
consumption goods demands a steady addition of current pro- 
ductive powers. At each stage of the production process new 
labour is added to the intermediate products which have been 
passed on to it from the previous stage, and they pass on to 
the following stage in a more advanced state. In one stage 
the intermediate product wool is changed, by the addition of 
labour, into the intermediate product yarn ; that again in a 
following stage, by the addition of labour, into the intermediate 
product cloth, and so on. This has the natural result that, 
within each branch of production, the amount of invested 
capital increases with each advancing stage of the production, 
or, what is the same thing, at every change into a lower 
circle. Consequently not only are the lower circles, as has 
been shown, supplied from more branches of production, but 
they are supplied with relatively larger amounts of capital, 
and this gives the lower classes a twofold numerical superiority 
over the higher ones. 1 

On these lines we may now put our illustration into 
figures. To facilitate our survey we shall assume that the 

1 Durable productive goods, which give off their use gradually in the course 
of several years, belong naturally (in various parts of their content as u eful goods, 
or in various annual circles of their activity) to several circles simultaneously. 


total capital of the community is comprised in ten yearly 
circles. If thirty million labour-years are embodied in this 
total capital (for simplicity's sake I again leave out invested 
uses of land) we may assume the following division of the 
circles. The 

1st circle contains the intermediate products of 6 million labour-years. 



















3 5 



5 th 










































In the normal course of things the outmost circle becomes 
divided off from capital each year, and is changed into con- 
sumption goods, but the succeeding circles press forward, each 
circle, by the addition of new labour, advanced one stage, 
both as regards nearness to maturity and amount of capital 
invested. The first class, therefore, is changed into consump- 
tion goods, the second class into the first, the third into the 
second, and so on. Now the following important questions 
suggest themselves. What use must the community make 
of the original productive powers which come anew into its 
possession during the current year — that is to say, the new 
ten million labour-years if, for simplicity's sake, we still leave 
out uses of land — in order to conserve the capital that is in 
existence ? And how must it act to increase that capital ? 

These questions are easily answered. To keep the capital 
at the present level the community must not spend more than 
four million labour-years in present-time production. 1 

With the remaining six million labour-years the stock of 

1 Under this name (Gegenwartsproduktion) I mean to group, for the sake of 
shortness, all those acts of production which agree in this, that the original pro- 
ductive powers which are put forth in these acts reach their goal, and turn out 
consumption goods, within the same economic period. This applies to two kinds 
of productive acts-; partly and principally to those of the final stages, the labour 
required to transform the first circle of capital into consumption goods (e.g. agri- 
cultural labour, the labour of the miller, baker, shoemaker, tailor, etc.), partly 
to industries where the production process is short, and can be carried through 
from beginning to end within a single economic period. 



capital, reduced by the separating off of the first year's circle, 
must be brought up in quantity and quality to its former 
level. This demands that the nine other yearly circles be 
brought each one step nearer maturity by the addition of the 
requisite labour, and that the tenth class, which is now non- 
existent, be new created. The amount of labour necessary for 
this may be exactly determined. The former second class, in 
which as yet only five million labour-years have been embodied, 
needs, in order to make it entirely equal in value to the former 

first class, an addition of \ million labour-years. 

The 3d class needs an addition of 1 „ „ 

„ 4th 

>> j 

, 0-5 

„ 5th 

it j 

, 0-5 

„ 6th 

» > 

, 0-5 

„ 7th 

>> > 

, 0-5 

„ 8th 

J) > 

, 0-3 

„ 9th 

» i 

, 0-4 

„ 10th 

» J 

, 0-3 

And the creation of a new 10th 
class requires the labour of 

In all 

It should be noted that it is not a matter of indifference 
at what point, in which particular circles, the six million 
labour-years are spent. If, for instance, they were to be spent 
in making intermediate products, but not according to the 
above distribution — say they were all spent in making inter- 
mediate products of the first circle, which would come to 
maturity in a year's time — the disadvantage would be two- 
fold : first, the production processes which had only got the 
length of intermediate products of the higher classes would be 
brought to a standstill ; and second, as we know, the shorter 
methods would be less productive. With six million labour-years 
invested in a one year's process, the present would hand over 
to the future the same number of productive powers indeed, 
but — what in the last resort is the important thing — these 
powers would, in virtue of their one year's process, be capable 
of producing only a smaller amount of products than the 
present has received for consumption from the past. The 
next, year's production, therefore, would necessarily be reduced, 
and the stock of capital would not "be maintained at its former 


Again, if the present stock of capital is to be increased, it 
is evidently necessary that the community give up a portion 
of the consumption which it might have enjoyed — while still 
maintaining the stock at its former height ; — that it withdraw 
a portion of the productive powers at its disposal from the 
service of the present ; that it save and employ them for 
additional future production. Productive powers may be 
saved in various ways. (1) Other dispositions remaining 
unchanged, a smaller portion of the current productive 
powers — say three instead of four million labour -years — 
may be employed in immediate " present -time production." Or 
(2) the arrangements for saving may have been already made, 
and the total capital organised in such a way that the circle 
which is now passing over into the stage of full maturity con- 
tains a less quantity of capital, say five instead of six million 
labour -years. Inasmuch, then, as only five instead of six 
million labour -years are now required for the replacement of 
capital, there remains — if, as before, four out of the ten million 
labour-years which are the current productive endowment are 
spent in "present-time production" — one million over, available 
for the formation of new capital. Or (3) it is conceivable that, 
at the last moment, the disposition of the capital should be so 
altered that less passes into the stage of full maturity than 
was originally contemplated. It is a familiar fact that there 
are many goods which admit of being employed in a 
variety of ways. This often makes it possible to put back 
goods which have already attained full maturity, or which 
stand quite near to maturity, by several stages. Grain, for 
instance, instead of being ground for food purposes, may be 
stored for seed, or used in distilling ; coal may heat the blast 
furnace instead of the domestic oven ; iron may build machinery 
instead of park railings ; and so on. If, by thus disposing 
goods differently, the amount of capital which arrives at 
maturity becomes reduced from six to five million labour- 
years, there will, after four million labour -years have been 
expended in " present-time production," be one million labour- 
years free for the making of new capital. 

All three methods, then, — of which, in practical life, the 
second is most common, and the first is least so, — agree in one 
essential point, that during the current year the produce of 


nine million labour-years only is consumed, while ten million 
labour-years come forward ; that accordingly, in other words, 
one million labour-years of the current productive endowment 
are saved. 1 

Hitherto we have spoken of the formation of capital by a 
community as if in such a community there was one single 
economy, guided by one individual will. Of course this is not 
the case. It remains, therefore, for us to show how, in a 
community where industry is divided up and managed by 
many heads, the productive forces that conduce to the forma- 
tion of capital are actually disposed, and to inquire whether, 
as we have maintained, these dispositions presuppose " saving." 
And since it is claimed, and not without reason, that universal 
truths should be proved to hold not only in the present and 
historical organisation, but in every social organisation, I pro- 
pose in this inquiry to look both at the actual economic form, 
which is pre-eminently individualistic, and at that form which 
is at least conceivable, the socialistic. We may begin with 
the latter as being the easier from the standpoint of our 
present problem. 

In a socialist state from which private capital and private 
undertaking were banished, and where the entire national 
production was organised by the state, the formation of 
capital, and the previous saving of productive powers necessary 
thereto, would be controlled officially. The method would 

1 If, during the current year, there should be introduced such improvements 
in the technique of production that the capital, which had taken six million 
labour-years to produce, could be fully replaced by an expenditure of five million 
labour-years, there would be a change in the figures of our illustration, but the 
principle would remain the same It would now be possible to preserve the 
capital already in existence, even if five million labour-years were spent in 
present production, and if the produce of eleven million labour-years in all were 
3pent in immediate consumption (see above, note to p. 104). But in any case the 
formation of new capital would require the renunciation of some portion of that 
immediate consumption which would be possible if it were only wished to preserve 
capital at the same level ; in other words, would require that a portion of the 
"income," which might be consumed without diminishing the stock of capital, 
be not consumed but saved. Moreover, if technical improvements did not con- 
tinue to be made, then, after some years — that is to say, when the capital pro- 
duced according to the old methods of production was quite used up, — the old 
figures would come true again ; capital vrould be kept at the same level if in 
any period the produce immediately consumed just corresponded to the pro- 
ductive powers which came forward anew in the same period. 



simply be to put a considerable proportion of the national 
workers to very lengthy processes, whereby the making of 
capital, in the form of intermediate products, would be very 
great, and the amount of matured products in the future would 
be much increased. Many workers, relatively speaking, would 
be put to mining, railway-building, regulation of rivers, machine- 
making, and the like, and few to wine-growing, silk-spinning, 
lace-making, beer-brewing, cloth-making, and the like. The 
people would thus be compelled to save by pressure from 
above, inasmuch as, of the national production thus conducted 
by the state, in each year relatively few goods would be put 
at their disposal for immediate consumption — less, that is to 
say, than might be annually produced and consumed if the 
existing stock were merely to be maintained. The productive 
powers left free would be invested in lengthy capitalist pro- 
cesses of production. 

Somewhat more complicated, but still easy to grasp in 
principle, is the procedure in the individualistic organisation of 
society as we find it in the present day. Here, in the first 
instance, it is the undertakers who decide how the productive 
powers, as they come forward annually, shall be employed, and 
they thus decide the direction which the national production 
takes. But they do not decide it at their pleasure ; they 
follow impulses given by the prices of products. Where lively 
demand promises a profitable price they extend their produc- 
tion, and curtail it in those kinds of goods where failing 
demand can no longer take off the supply, and the prices fall 
below a paying level. Extension and contraction of supply 
continue till such time as production has adapted itself to the 
desire for the particular commodities. In the last resort, 
therefore, it is not the undertakers who decide the direction of 
national production, but the consumers, the "public." All 
depends on the effective desire they exert by means of their 
income. The income of a people is, in the long-run, identical 
with the return of its production. The circle that represents 
a year's income coincides, roughly, 1 with the circle that re- 

1 I have neither time nor desire to go into subtle distinctions here, although 
there is material enough for them. Interesting investigations into the relation 
between national product and national income — although I cannot altogether 
agree with them— may be found in R. Meyer's book, pp. 5, 84. See also the 
investigations of Lexis (which appeared while the present volume was passing 


presents a year's return of its productive powers. If every 
individual in the community were to consume exactly his 
year's income in the form of consumption goods, there would 
arise a demand for consumption goods which, through the 
agency of prices, would induce the undertakers so to regulate 
production that, in each year, the return of a whole year's 
circle of productive powers would take the form of consumption 
goods. If ten million labour -years (and the corresponding 
uses of land) form the annual endowment of a people, and this 
people wishes, to consume, and does consume, the whole of its 
income in the form of consumption goods, it is a necessity that 
the produce of the whole ten million labour-years (together 
with the corresponding uses of land) be changed each year 
into the form of consumption goods. In this case there is no 
productive power left to dispose of in increasing capital, and 
capital only remains as it was. 

If, on the other hand, each individual consumes, on the 
average, only three-quarters of his income, and saves the rest, 
obviously the wish to buy, and the demand for, consumption 
goods will fall. Only three-fourths of the former consumption 
goods will find demand and sale. If the undertakers, however, 
were for some time to continue the old dispositions of produc- 
tion, and bring to market consumption goods to the amount of 
ten million labour -years, the over -supply would very soon 
press down the price, business would become unremunerative, 
and the pressure of loss would compel the undertakers to 
adapt their production to the changed circumstances of 
demand. They will now provide that, in one year, only the 
produce of seven and a half million labour-years is transformed 
into consumption goods (whether it be by the maturing of the 
first class, or by adding to " present-time production " l ), and 
the two and a half millions which remain of the current year's 
endowment may and will be spent in the increasing of capital. 
I say "will be spent," for an economically advanced people 
does not hoard,- but puts out what it saves — in the purchase of 

through the press), entitled Ueber gewisse Werthgesammthciten und deren Bezieh- 
ungen zum Oeldwerth {Tubingtr Zeitschrift, forty -fourth year, part ii. p. 221), 
where also the yearly "consumption sum," "production sum," and "primary 
income sum" are treated as "quantitatively, approximately equal" amounts. 

1 The change of disposition will, as we have seen, be made essentially easier 
by the adaptability of many forms of capital to various uses. 


valuable paper, in deposits in a bank or savings-bank, in loan 
securities, etc. In these ways the amount saved becomes part 
of productive credit ; it increases the purchasing power of pro- 
ducers for productive purposes ; it is thus the cause of an extra 
demand for means of production or intermediate products ; 
and this, in the last resort, induces those who have the regula- 
tion of undertakings to invest the productive powers at their 
disposal in these intermediate products. 

We see, therefore, as a fact, an intimate connection be- 
tween saving and formation of capital. If no individual saves, 
the people, as a whole, cannot accumulate capital, because the 
great consumpt of consumption goods forces the producers, by 
the impulse of prices, so to employ the productive powers that, 
every year, the produce of a whole year's endowment is 
demanded and used up in the shape of consumption goods, 
and no productive powers are left free for the increasing of 
capital. But if individuals save, the altered demand, again 
through the impulse of prices, compels the undertakers to dis- 
pose of the productive powers differently ; fewer powers are 
put, each year, at the service of the present, and thereby 
is increased the amount of those productive powers whose 
produce will be found in suspense as intermediate products ; in 
other words, the economical capital will be increased with a 
view to an increased consumption in the future. 

Now there is still a third possibility. Individuals may 
consume, on the average, more than their income ; instead of 
saving they may waste their parent sum of wealth. Accord- 
ing to our theory, this must lead to a diminution of the 
community's capital, and, as a fact, it does so. The steps of 
the process are as follows. By the prevailing extravagance 
more than a year's income of the community, and, therefore, 
more than the produce of one year's circle of productive powers, 
is demanded in the shape of consumption goods. Production, 
compelled by the impulse of prices, yields to the demand. 
For instance, the former disposition was that the first circle, 
with its six million labour -years, should mature during the 
current year, and that, of the ten million labour -years that 
form the current endowment, four millions should be spent in 
" present-time production," and the other six in replacing the 
capital consumed. Now we shall suppose that, through the 

chap, v NO MYSTERY ABOUT IT 117 

extravagant manners of the citizens, the year's demand for 
consumption goods rises till it requires the produce of twelve 
million labour-years. The undertakers will act in something 
like the following manner. Of the current labour endowment 
they will invest, perhaps, not four but five million labour- 
years in present production, and, in correspondence with this, 
the amount devoted to the replacement of capital will shrink 
from six to five millions. This will cover one million of the 
extra amount required. At the same time, by differently dis- 
posing of such goods as allow of more than one employment, 
they will perhaps divert the produce of another million of 
labour-years from a more remote class into the first class, and 
thus add it to the consumption of the current year. This will 
cover the second million of the extra demand. The com- 
munity now receives and consumes what it desires, the pro- 
duce of twelve million labour-years in the form of consumption 
goods ; l but it does so at the expense of the stock of capital, 
which is insufficiently replaced, and so diminished by two 
million labour-years. 2 

Possibly I have wasted too many words in proving a truth 
so obvious that no thinking man unskilled in science would 
ever doubt it. Every child knows that a piece of capital, say 
a hammer, must be produced if it is to come into existence. 
And to every simple man it is obvious that no stock of capital 
can be made, or can increase, if men regularly consume their 
whole available income ; if, in other words, they do not save. 
It was reserved for the sharp and subtle wits of learned 
theorists to suggest the first doubt about it. This, however, 
it would have been difficult to do if, instead of dogmatising 
on the formation of capital, they had attempted to give a 
complete and faithful representation of the process by which 
capital is formed. Here lies the entire, but almost the only, 
difficulty of these and many other economical doctrines ; and 
this suggests, I might add, the reason why so many abstract 

1 Viz. six million from the original provision of the first circle, one million 
diverted and added to that by changed disposition, and five millions from the 
current labour endowment. 

2 The stock originally embraced the return of thirty million labour-years ; it 
now gives seven millions to the consumption of the current year, and it receives 
only five millions to replace them, whereby it falls from thirty to twenty-eight 
million labour-years. 


deductions are discredited and fail of result. It is not the 
deductive method that deserves the distrust, but the persons 
who misapply it. Vulgar errors in thought, indeed, are quite 
exceptional among capable thinkers ; and here the fault lies 
mostly in this, that the economists in question could not put a 
sufficiently clear and life-like picture before their minds of the 
circumstances and processes which they introduced into their 
deductive arguments as assumptions, or, at least, did not keep 
it persistently enough before them through all stages of the 
deduction. Hence, losing touch with life, they began to make 
deductions, not from truth of facts, but from words of formulas, 
and so fell without knowing it into the emptiest dialectic. It 
is because so many economists, as it seems to me, have made 
this mistake, that I risk being tedious rather than being sus- 
pected of sophistry. 



It is perhaps advisable to supplement cur positive statement 
by a brief critical consideration of the most important objections 
that might be urged. Two of these appear to me particularly- 
worth noticing. The first is, that the majority of goods which 
constitute capital are, by nature, quite unfitted to immediate 
consumption. There is, therefore, no sacrifice in withdrawing 
them from a use which they could never serve. Indeed, it is 
ridiculous to speak of the " non-consumption " of steam-engines 
and land improvements, of roofing tiles and bars of metal, as 
an act of saving or abstinence. 1 

To me this seems a somewhat cheap, but still perfectly 
good, argument against those who formulate the theory of 
saving superficially or falsely. But, as against the essence of 
the theory, it proves nothing. If any one is stupid enough to 
interpret the theory of saving as meaning that finished capital, 
in its form as concrete capital, must be " saved," he must 
submit to the retort that man cannot eat iron machines. 2 But 
this is not at all the meaning of any thoughtful representative 
of the theory. What is maintained is only that, without 
saving, capital cannot be made or increased ; that saving is as 
indispensable a condition of the formation of capital as is labour. 
And this is literally correct. The machines themselves have 

1 This is very strongly put by the Socialist writers, as, e.g., Lassalle {Kapital 
und Arbeit, p. 69) ; Rodbertus (Das Kapital, p. 271). In a somewhat diluted 
form the same doctrine appears in Wagner (G-rundlegung, second edition, p. 600), 
who makes a distinction between goods in which the peculiarities of capital are 
inherent, and those in which they are not. The former are not, at least " directly," 
objects of saving. Similarly Kleinwachter (Schbnberg's Handbuch, first edition, 
p. 173). 2 Lassalle. 


not been saved, but built. But in order to build them, 
men had previously to withdraw the productive powers 
necessary to building them from the service of the present ; 
they had, therefore, in the strictest sense of the term, to 
save them. 1 

It may serve towards the settling of this controversy to 
remark that the idea of sacrifice, of renunciation, and thus of 
moral desert, need not be associated with the conception of 
saving. 2 There may be sacrifice in saving, and it may be 
praiseworthy, but not at all necessarily. A man with a small 
income will, of course, feel it a sensible privation, and it will 
require strong self-denial in him to lay past anything ; while 
one who has an income of £100,000, and is content to con- 
sume one half of it, has little claim to be considered a hero of 
asceticism because he saves the other half as capital. It is 
simply the fact of a saving that is indispensable to the forma- 
tion of capital ; whether there is sacrifice and moral desert in it 
or not is all the same to the result. And it follows from this 
that the theoretical truth, that " saving " is necessary to the 
formation of capital, cannot and must not be used to justify, 
either morally or socio -politically, all and every taking of 

1 In the second edition of Schbnberg's Handbuch (p. 214) Kleinwachter comes 
a long way nearer our conception in assenting to it, as regards at least one of 
the chief forms of capital — tools of production. He allows that the making of 
such tools " always involves, to a certain extent, the renunciation of an immediate 
enjoyment," because the materials which are made use of in making the tools of 
production might have been employed in making some kind of consumption 
goods ; and thus there is no reason for objecting to call such a renunciation of 
enjoyment by the name of Saving. But it is different, he says, with the materials 
of production. Such things as raw wool, stone, and lime, etc., could not in any 
way be objects of direct consumption, and so could not be saved ; they must be 
looked on, therefore, economically as products of labour only, and not as the 
result of saving. In this Kleinwachter is not logical. As regards the tools of 
production he, quite correctly, does not consider whether the finished tools them- 
selves might have been consumed, but whether, by the instruments from which 
the tools were made, any consumption good might have been made ; and because 
this is the case he answers the question as to saving in the affirmative. But if 
he had kept to this line of thought as regards the materials of production, he 
must have seen that, by means of the same productive powers as man uses to 
quarry stone, to build a house, or obtain lime for mortar, he might have made 
himself goods for immediate consumption, — e.g. hunted wild animals or caught 
fish, — and that here, consequently, on exactly the same grounds and in exactly 
the same way as in the case of tools, saving does come into the question. 

2 See above, p. 102. 


interest. This is another instance of that confusing of the 
theoretical with the socio-political problem of interest which I 
adverted to in another place 1 as having done so much harm. 
One side mixed up the theoretical doctrine that the formation 
of capital must be preceded by saving, with the moral judgment 
that interest is justified as the " reward of abstinence," and the 
other side, which saw, quite correctly, that interest could not 
be justified in such general terms, was misled, by the same 
confusion of the problems, into denying nob only the false 
socio-political deduction but the true theoretical premiss. 

If these two problems are kept distinct it will help us to 
give both parties their due. To Rodbertus and Lassalle we 
may grant at once that saving need not be moral heroism, and 
therefore is no sufficient socio-political justification of interest ; 
but we must stand for the recognition of the theoretical truth 
that the fact of saving is in any case required to the formation 
of capital. 

A second objection lays emphasis on the fact that, for a 
man to be able to accumulate capital, he must acquire more 
than he uses, and draws the conclusion that it is essentially 
the productivity of labour — industriousness and not abstinence 
— to which the formation of capital is due. Thus Rodbertus 
says, in so many words, that if, in the beginnings of economic 
development, an " isolated worker has no time to make a tool 
because he must always live from hand to mouth," the blame 
lies simply in the productivity of labour being too small. If, 
later, this productivity increases so much that, say, eight 
hours' labour is sufficient to produce the day's maintenance, 
then " from the labour time, which up till now he had to devote 
entirely to make what was absolutely necessary, he has a 
portion over for other labour, and it is this spare labour which 
he is now able to devote to the making of a tool." And from 
this quite correct consideration Rodbertus draws the conclusion 
tha.t it is only the increasing of the productivity of labour, and 
not saving, which makes the existence of such a primary capital 
possible. 2 And still more briefly and strongly does Klein- 
wachter give expression to the same idea when he says : " He 
who transfers a portion, say a half, of his revenue to the bank 
is merely industrious. He might, for instance, by a five hours' 

1 See Capital and Interest, p. 3. 2 Das Kapital, p. 242. 


day of labour earn his bare maintenance, and devote, say, 
every afternoon to his recreation or enjoyment ; instead of 
which the man works ten hours a day, and regularly carries 
what he earns in the afternoon to the savings-bank." l 

I think this objection is very easily met. It is simply 
not correct to say that the man is " merely industrious." He 
is industrious and saving. If he were simply industrious 
he would, every day, spend the produce of the afternoon's 
labour, along with the produce of the forenoon's labour, in 
immediate enjoyment of life. That he does not do so is 
because he is saving as well. I freely admit that greatei 
industriousness, causing a return far exceeding necessary require- 
ments, and, similarly, greater productivity of labour, very 
much facilitate saving, just as I admit also that, without 
acquisition, saving, as well as formation of capital, is absolutely 
impossible. But I must as emphatically claim recognition of 
the fact that the greatest acquisition could not lead to the 
formation of capital if a portion of it were not withdrawn from 
present use and " saved." Production and Saving form two 
equally indispensable conditions of the formation of capital, 
and it is only dialectical one-sidedness — which, unfortunately, 
has already played much too great a part in the doctrine 
of capital — that could deny the co-operation of either of 
them. 2 

But does not this involve me in contradiction with the 
proposition so earnestly contended for in last chapter, that all 
goods (and consequently all capital) proceed from two elements, 
of which saving is not one, viz. from nature and labour ? 3 
Certainly it does not. It is not my intention to do as Senior 

1 Kleinwachter, in Schbnberg's Handbuch, second edition, p. 215. 

2 A very striking illustration of these words may be found in the already- 
mentioned utterances of Rodbertus on the subject. On p. 242, from the fact that, 
if the productivity of capital is too small, there can be no saving and no forma- 
tion of capital, he contents himself with drawing the quite correct conclusion 
that " necessarily some other element besides saving must intervene." Thus he 
ascribes to saving its proper place, as not sufficient by itself, but, all the same, as 
a factor of the formation of capital. It is only on p. 243 that the fact of a 
certain degree of productivity of labour being indispensable is dialectically 
changed into the statement that only the increase of productivity, and not saving, 
makes the formation of capital possible. 

3 A similar objection was urged by the old economist Lauderdale against the 
Saving theory, Inquiry, pp. 207, 272. 


did, 1 and try to make Saving a third factor in production 
along with Nature and Labour. It does not stand beside these 
factors, but behind them. It does not share with them in 
the work of production in such a way that any part of the 
same is due to it solely and peculiarly ; it only effects that the 
productive powers, nature and labour, which in any case must 
do the whole work of production, are directed straight to this 
and no other goal — the production of capital and not of con- 
sumption goods. In a word, it has its place, not among the 
means of production, but among the motives of production — 
the motives which decide the direction of production. The 
proposition, then, that nature and labour are the only true 
productive powers, can stand perfectly well beside the wider 
assertion, that, if capital is to come into existence at all, there 
must, first, be certain intellectual dispositions through which 
renunciation is made of a portion of the immediate consump- 
tion that is otherwise possible ; in other words, there must be 
" Saving." 

Saving, it is objected again, is a "non- consumption" — 
something purely negative ; and a pure negation can bring 
forth nothing. 2 To my mind there is more dialectic than truth 
in this argument. Is it quite correct to say that saving is some- 
thing purely negative ? How comes it, then, that, although 
nothing is easier than a " pure not-doing," so many people feel 
saving an uncommonly difficult and disagreeable thing ? In 
truth, saving is a mental business ; and often, indeed, though 

3 Political Economy, third edition, p. 57, where three great agents or in- 
struments of production are distinguished — Labour, Natural Agents, and 

2 Marx, Das Kapital, second edition, i. p. 619, in note (English translation, 
p. 608): "It has never occurred to the vulgar economist to make the simple 
reflection, that every human action may be viewed as ' abstinence from its 
opposite. Eating is abstinence from fasting, walking abstinence from standing 
still, working abstinence from idling, idling abstinence from working, etc. 
These gentlemen would do well to ponder, once in a way, over Spinoza's Deter- 
minatio est Negatio." Gide, Principes oVEc. Pol. p. 168: "Un act purement 
negatif, une abstention ne saurait produire quoi que ce soit. . . . Sans doute on 
peut dire que si ces richesses avaient ete consommees au fur, et a mesure qu'elles 
ont pris naissance, elles n'existeraient pas a cette heure, et qu'en consequence 
l'epargne les a fait naitre une seconde fois. Mais a ce compte, il faudrait dire 
qu'on produit une chose toutes les fois qu'on s'abstieut d'y toucher et la non 
destruction devrait etre classee parmi les causes de la production, ce qui serait 
une singuliere logique." 


not always, a very troublesome mental business, preceded by 
long deliberation and conflict between contending motives. 
This, of course, does not constitute an act of production, and 
the representatives of the above dialectical objection are, 
in the end, quite right in raising it as an argument against 
those theorists who would dignify saving by the name of a third 
factor in production. But, indeed, simply mental as saving 
may be, it is sufficient to effectually fill the role which we 
have assigned to it in the formation of capital, viz. exerting 
an influence on the direction of production. 

For the rest, whether it be a " pure negation " or not, we 
can, in no case, allow dialectical considerations to interfere with 
establishing important scientific facts. And it is an import- 
ant scientific fact, which must be reiterated all the more 
emphatically that it has been disputed, that the progress of 
capital stands in a causal relation with the extension of the 
immediate claims put forward by individuals and peoples. 
Whatever body — be it an individual or a people — extends the 
claims of the moment so far as to exhaust, during the current 
period, the entire amount of consumption goods which its 
income makes possible for the current period, can neither 
make new nor increase old capital ; and this fact finds accurate 
and straightforward expression in the proposition that saving 
is an indispensable condition of the formation of capital. 1 

Suppose now that we have succeeded, after considerable 
trouble, in establishing the proposition that capital comes into 
existence through saving and devotion to production of what is 
saved, we have still got but half the answer to our inquiry as 
to the formation of capital. We have now to face the further 
question : On what does it depend that people can, will, and 
actually do save and produce intermediate products ? Strictly 
speaking, this second question is the more important of the 
two ; it points to the impelling and working forces in the 
formation of capital, while all that has preceded has merely 
laid down the external forms of the process. 

J I will not, a priori, deny that possibly one might contrive to hunt up some 
subtle examples where capital (particularly social capital) comes into existence 
without saving properly so called. But all the more strongly do I hold by my 
proposition that, as regards the great mass of the economic formation of capital, 
saving, in the way I have indicated, has its place. 


The most general answer, but still, it must be confessed, 
insufficient for all its generality, runs thus : what people look 
to in economic life is the Value of goods. Here we touch a 
subject which is too important and too difficult to be spoken 
of merely in passing. To obtain the basis for the principal 
part of our work — the explanation of interest — we require 
to go into the theory of value. I shall, therefore, leave the 
theory of the formation of capital at this stage, returning to it 
shortly in the last chapter, where we shall give it the logical 
conclusion that it still lacks, 





In the science of Political Economy, as in ordinary speech, two 
very distinct things have usually been classed together under 
the one name of Value. From the first it could scarcely escape 
notice that there was a difference between them, but the full 
extent of the difference was certainly underrated. Instead of 
being recognised as phenomena belonging to entirely distinct 
categories of thought, they were, quite falsely, represented as 
members of one and the same group of phenomena, and, under 
the not very felicitous names of Use Value and Exchange 
Value, they were assumed to be sub-species of one universal 

1 My views on the subject of Value have already been published at length 
in another place (Gricndziige der Theorie des Wirthschaftlichen Gutcnvcrths, in 
Conrad's Jahrbiieher filr Nationalokonomie und Statistik, vol. xiii. 1886, pp. 
1-86 and 477-541). Since then I have seen no reason to change them. What I 
have now to say on the same subject can, therefore, offer but few new features. 
On the whole, what follows is an extract from my former work adapted to the 
requirements of the theory of capital, and, in the composition of it, I have gone 
on principles suggested by the nature of my present task. Those fundamental 
ideas on whieh the understanding of the whole depends, and those lines of thought 
with which the theory of capital is specially connected, I have taken in all their 
detail from my other book ; and, as a simple change of form would have been as 
troublesome as it was useless, I have taken them, for the most part, without 
change. I have omitted, on the other hand, all those explications, demonstra- 
tions, and so on, which were important for the Value theory, but seemed not 
altogether indispensable for the understanding of the theory of Capital. In place 
of these I have added a good deal of matter in which I have taken advantage of 
the newest literature on the subject, and have tried to give a still clearer formula- 
tion to several ideas, and, particularly, to develop with more exactitude special 
points where the value theory comes into more intimate connection with the 
theory of capital. The most important additions occur in chapter vii. of the 
present book, and at the end of chapter v. and in chapter vii. of the next book. 
F ^aders who are interested in the theory of value and price for its own sake, I 
I juld ask to consult the statement in Conrad's Jahrbiieher, which is much more 
mplete, and which I tried to make easier by numerous references. 



conception of Value, and distinguished from each other as such. 
This distinction once made, however, the so-called Use Value 
was almost entirely dropped out of sight. Economists took no 
trouble to inquire any deeper into its nature, nor did they 
make any use of it in further investigations. They simply 
catalogued it, as it were, among the conceptions of political 
economy, and left it lying in a corner of their systems like a 
stone for which there was no use. It is only of very recent date 
that economical investigation has discovered in this " stone re- . 
jected of the builders " the basis and support of one of the most 
important conceptions of economics, and has awaked to the fact 
that on it depends a group of most notable laws — laws with 
consequences reaching far beyond the boundaries of the theory 
of value, and laws to which almost every branch of economic 
theory must go back for its root and spring. 

But, first of all, it is important that we give right names 
to those things which tradition has handed down to us under 
the inadequate designations of Use Value and Exchange Value. 
The two groups of phenomena, to both of which popular usage 
has given the ambiguous name " Value," we shall distinguish 
as value in the Subjective and value in the Objective sense. 1 

Value in the Subjective sense is the importance which a 
good, or a complex of goods, possesses with regard to the well- 
being of a subject. In this sense I should say of any par- 
ticular good that it was valuable to me, if I recognised that my 
wellbeing was so associated with it that the possession of it 
satisfied some want, secured me a gratification or a feeling 
of pleasure which I should not have had without it, or saved 
me from a pain which, otherwise, I should have had to endure. 
In this case the existence of the good means my gain, the 
absence of it my loss, in wellbeing : to me it is a matter of 
importance, for me it has value. 

By Objective value, on the other hand, is meant the Power 
or Capacity of a good to procure some one objective result. In 
this sense there are as many kinds of value as therQi are external 
results with which man may be connected. There is a nutritive 

1 I frankiy confess that I would gladly exchange these pedantic and clumsy ex- 
pressions for terms more euphonious and popular, if they could be got to indicate 
th» opposition referred to with even approximate correctness. But I have no' been 
able to find such expressions. The words Use Value and Exchange Value are not 
suitable at all, because, as we shall see, there is a Subjective exchange value. 


value of food, a heating value of wood and coal, a fertilising 
value of manures, a blasting value of explosives, and so on. In 
any expressions of this kind all reference to the wellbeing or 
illbeing of a subject is excluded from the conception of value. 
If we affirm that beech has a superior heating value over pine, 
we only express the purely objective and, as it were, mechanical 
fact that with a definite weight of beech a greater amount of 
heat can be raised than with the same weight of pine. ^In the 
above connections, then, instead of the word " Value " we use, 
as entirely synonymous with it, the expressions " Power " or 
" Capacity " — expressions which themselves suggest a purely 
objective relation. Instead of " nutritive value," " heat value," 
" explosive value," we use " nutritive power " or " nutritive 
capacity/' " heating power," " explosive power," and so on, as 
meaning exactly the. same thing. 

The varieties of Objective value just mentioned by way of ' 
illustration do not, however, belong to economical but to purely 
technical relations ; and, however frequently they are referred 
to in economical text-books, they do not properly belong to 
political economy at all. It does not fall within the province 
of our science to expound the heating value of wood, nor, in 
explaining other economical phenomena, has it occasion to lay 
stress on this heating value any more than it does on any other 
physical or technical fact. I have given these illustrations 
purely as illustrations, with the intention of putting in clearer 
relief the very intimately related nature with the above of that 
branch of objective values which, of course, has the greatest 
possible importance for political economy, namely, the objective 
S Exchange value of goods. By this expression I mean the 
objective worth of goods in exchange ; or, in other words, the 
possibility of obtaining in exchange for them a quantity of 
other economical goods, this possibility being looked upon as 
a power or a property of the former goods. In this sense we 
say that a horse is worth £50, or a house worth £1000, if, in 
exchange for these, we can obtain, respectively, £50 or £1000. 
Here, again, it must be noted that, as in the kindred 
expressions heating value and the like, we say nothing at all 
as to the influence which goods may exert on the wellbeing of 
any subject whatever ; we simply indicate the objective relation 
that for a particular good a certain amount of other goods may 


be had in exchange. In this case also the characteristic 
phenomenon recurs, that the word " Value " can be, quite 
adequately, replaced by the word " Power," and is, indeed, so 
replaced in popular speech. Besides the expression "value 
in exchange" English economists use, quite indifferently, the 
expression " purchasing power," and we Germans are beginning 
in the same way to put in general use the term Tauschkraft. 

The economical theory of value has, then, the double task 
of interpreting, on the one hand, the laws of Subjective Value, 
and, on the other, trie laws of Objective Exchange Value, as 
from the economic point of view by far the most important 
branch of objective value. The first part of this task we 
shall take up in the present book, the second in the follow- 
ing book dealing with the theory of Price. It is true that 
the two conceptions, " Price " and " Exchange Value," are by 
no means identical. Exchange Value is the capacity of a 
good to obtain in exchange a quantity of other goods. Price 
is that other quantity of goods. But the laws of these two 
coincide. So far as the law of price explains that a good 
actually obtains such and such a price, and why it obtains it, 
it affords at the same time the explanation that the good is 
capable, and why it is capable, of obtaining a definite price. 
The law of Price, in fact, contains the law of Exchange Value. 1 

1 The foundations of the modern value theory have been laid by three writers 
whose work is in substantial agreement — Carl Menger, Jevons, and Walras. Of 
these, in clearness and completeness, Monger's statement takes the first place. 
Twenty years before his time, several of the most weighty and fundamental ideas 
had been already propounded by Gossen in his remarkable book, Entvncklung 
der Gesetze des menschlichen Verkehrs und der daraus fiiessenden Regeln fur 
menschliches Handeln, Brunswick, 1854. Like the book itself, these ideas sank 
into complete but undeserved oblivion, and had to be rediscovered by the 
economists just mentioned. That this was done almost simultaneously by three 
different men, belonging to three different nations, and quite independently of 
each other, is a very remarkable coincidence, and is, at the same time, no 
small guarantee for the correctness of the principles on which all three were 
certainly agreed, although in thoroughness their statement of them was unequal. 
Since then these principles have had 9. notable development, and received wide 
acceptance. Not long ago, in the preface to his Theorie de la Monnaie (Lausanne, 
1886), Walras could give an imposing list of writers as adherents of the new 
theory. Since then we may add the name of E. Sax {Grundlegung der theo- 
rctischcn Staatswirthschaft, Vienna, 1887, p. 250), — with whom, however, I cannot 
agree in many particulars, particularly in those where he tries to establish original 
ideas that are not in harmony with those of his predecessors ; and that of R. 
Meyer {Das Wesen des Einlcommens, Berlin, 1887). 



All goods without exception — indeed according to the very 
conception of them as " good " — possess a certain relation to 
human wellbeing. There are, however, two essentially distinct <s 
grades of this relation. A good belongs to the lower grade 
when it possesses the general capacity to subserve human weal. 
The higher grade, on the other hand, demands that a good 
should be more than merely a sufficient cause ; it must be an 
indispensable condition of human wellbeing — a condition of 
such a kind that some gratification stands or falls with the 
having or wanting of the good. In the expressive vocabulary 
of everyday life we find a separate designation for these grades. 
The lower is called Usefulness, the higher Value. This dis- 
tinction, already recognised in common speech, we must try to 
make as clear and well-marked as its fundamental importance 
for the whole theory of value deserves. 

A man dwells beside a bubbling spring of water. He 
has filled his cup, and the spring goes on pouring out enough 
to fill a hundred other cups every minute. Another man is 
travelling in the desert. A long day's journey over glowing 
sand still divides him from the nearest oasis, and he has 
come to his last cup of water. What is the relation in 
each case between the cup of water and the wellbeing of 
its owner ? 

A single glance shows us that the relation is very dis- 
similar ; but wherein lies the difference ? Simply that, in the 
former case, we have only the lower grade of the relation we 
call wellbeing, that of usefulness ; in the latter case we have 
the higher grade as well. In the first case, just as in the 


second, the cup of water is useful, that is, capable of satisfying 
a want, and, moreover, in exactly the same degree ; for 
evidently the refreshing qualities of the water — the qualities 
on which its capacity to quench thirst is based, such as cool- 
ness, taste, etc. — are not in the least degree weakened by the 
fact that other cups of water chance to possess similar 
properties ; nor,* in the second case, are these refreshing 
qualities in the least augmented by the accidental circum- 
stance that there is no other water near. On the other 
hand, the two cases become essentially distinct when con- 
sidered with reference to the second grade. Looking at the 
former case we must say that the possession of the cup of 
water does not provide the man with one single satisfaction 
more, nor its loss with one satisfaction less, than he could 
have obtained without it. If he has that particular cup of 
water he can quench his thirst with it ; if he haa not that cup 
— well, he can quench his thirst quite as well with one of the 
hundred others which the spring puts freely at his disposal 
every minute of the day. If he likes, therefore, he may make 
that one cup the cause of his satisfaction by quenching his 
thirst with it; an indispensable condition of his satisfaction it 
cannot be; for his wellbeing it is dispensable, unimportant, 

It is quite otherwise in the second case. Here we must 
say that, if our traveller had not that one last cup, he could 
not quench his thirst ; he must bear its pangs unassuaged, 
perhaps even succumb to them. In the cup of water then, in 
this case, we see not merely a sufficient cause, but the indis- 
pensable condition, the sine qua non of human wellbeing, Here 
it is of consequence, even of urgency ; it possesses importance 
for his wellbeing. 

v/ Now it is not too much to say that the distinction here 
drawn is one of the most fruitful and fundamental in the 
whole range of our science. It does not owe its existence to 
the microscope nor to any hair-splitting distinctions of the 
logician. It has its life in the world of men, who know it 
and use it and take it as guide for their common attitude 
towards the world of goods, not only as regards the intellectual 
estimate they apply to these goods, but as regards their 
actual business transactions. About goods which are only 


useful the practical business man is careless and indifferent. 
The academic knowledge that a good may be " of use " cannot 
evoke any efficient interest in the good, in face of the other 
knowledge that the same use may be obtained without it. 
Such goods are practically naught as regards our wellbeing, 
and we treat them as such ; we are not put about when we 
lose them, and we make no effort to gain them. Who would 
fret at, or make an effort to prevent, the spilling of a cup of 
water at the spring, or the escape of a cubic foot of atmo- 
spheric air ? Where, on the other hand, the sharpened glance 
of the economic man recognises that some satisfaction, well- 
being, gratification, is connected with a particular good, there 
the effective interest which we take in our own wellbeing is 
transferred to the good which we recognise as its condition ; 
we see and value our own welfare in it ; we recognise its 
importance for us as value ; and finally, we develop an 
anxiety, proportioned to the greatness of that importance, to 
acquire and hold the good. 

v'Thus, formally denned, value is the importance which ai 
good or complex of goods possesses with respect to the wellbeing ( 
of a subject. Any addition to this definition, regarding the 
kind and reason of the importance, is, strictly speaking, not 
necessary, since goods can only have an effective importance 
for human wellbeing in one way, viz. by being the indispensable 
condition, the sine qua non, of some one utility which sub- 
serves it. In view of the fact, however, that in other defini- 
tions of value it is very often translated as an " importance," 
while the importance spoken of rests, erroneously, on a simple 
capability of utility, or, not less erroneously, on the necessity 
, of expenditure of costs, or the like, 1 we shall define it, un- J 
ambiguously and exactly, as : That importance which goods or / 1 
complexes of goods acquire, as the recognised condition of a 
utility which makes for the wellbeing of a subject, and would 
not be obtained without them. 

S All goods have usefulness, but all goods have not value. 
For the emergence of value there must be scarcity as well as 
usefulness — not absolute scarcity, but scarcity relative to the 
demand for the particular class of goods. To put it more 

1 See Conrad's Jahrbucher, vol. xiii. p. 11. 


exactly : goods acquire value when the whole available stock 

Of them is not sufficient to cover the wants depending on 
them for satisfaction, or when the stock would not be sufficient 
without these particular goods. On the other hand, those 
goods remain valueless which are offered in such superfluity 
that all the wants which they are fitted to satisfy are com- 
pletely supplied, and when, beyond that, there is a surplus 
which can find no further employment in the satisfaction of 
want, and which, at the same time, is large enough to spare 
the goods or quantities of goods that we are valuing without 
imperilling the satisfaction of any one want. 

After what has been said as to the nature of value, it 
should not be very difficult to prove these propositions. When 
the supply of goods is not sufficient, and some of the wants 
which they are adapted to satisfy must remain unsatisfied, it is 
clear that the loss of even a single good involves the loss of a 
possible satisfaction, while the addition of a single good in- 
volves the acquisition of a satisfaction otherwise impossible ; 
and it is clear, consequently, that some gratification or form of 
wellbeing depends on the existence of that good. Conversely, 
it is quite as clear that, if goods of any class are to be had in 
superfluity, there is no harm done if one of the goods be lost — 
since it can be immediately replaced from the superfluous 
stock ; nor any utility got if another such good be added — 
since it cannot be employed in any useful way. Suppose, for 
instance, that a peasant requires ten gallons of water per day, 
and no more, for general purposes — say, for his own drinking, 
for that of his family and servants, for watering his cattle, for 
cleansing, flushing, etc. — and suppose that the only spring within 
reach supplies no more than eight gallons a day. It is quite 
evident that he cannot spare one single gallon from his water- 
supply without suffering, to a more or less sensible extent, 
as regards the wants and aims of his economy. Every gallon 
in this case is the condition of a definite sphere of usefulness. 
Even if the spring supplied just ten gallons this would still be 
true But if the spring supplied twenty gallons per day, it is 
just as obvious that the loss of one gallon would not do the 
slightest injury to our peasant He can only employ ten 
gallons usefully, and he must let the other ten gallons flow 
away unused. If one gallon is spilled it is replaced from the 


overflow, and the only effect is that now the unusable surplus 
is reduced from ten gallons to nine. 

Now as it is the insufficient, or the barely sufficient, 
goods that are the objects of economical care^^ne goods we 
" economise " or endeavour to acquire and keep, — while such 
goods as are to be had in superfluity are free to everybody, 
we may express the above propositions shortly in the following 
form : All economical goods have value ; all free goods are 
valueless. 1 In any case it must steadily be borne in mind 
that it is only relations of quantity that decide whether any 
particular good is merely capable of use, or is also the con- 
dition of a utility for us. 2 

1 Some very interesting phenomena of value may, in certain circumstances, 
be exhibited by free goods also. For the explanation of this see my Qrundzilge, 
p. 15. 

2 Those numerous writers of whom Scharling is the latest instance (Conrad's 
Jahrbiicher, vol. xvi. pp. 417 and 513, and particularly 424, 430, 551), who say 
that the distinguishing criterion of "economical" and "valuable" goods is 
difficulty of attainment, the necessity of expending labour, and the like, are 
giving a secondary ground of definition instead of the really decisive and 
primary one. It is only when and because we are suffering, or fear to suffer, loss 
of satisfaction from insufficient supply of goods that we decide, generally speak- 
ing, to submit to the hardships of acquiring them, to labour, and so on. Labour 
and hardship could not by themselves confer an economical character on goods 
were it not that, for the most part, another circumstance, and that the really 
decisive one, is also present ; in other words, that those kinds of goods, which 
are difficult or troublesome to obtain, are, at the same time, the goods that 
remain scarce. That, however, it is not the difficulty but the scarcity that 
decides is vividly shown in those cases — not, 1 grant, very common — where the 
technical circumstances are of such a nature that the good can be got only, indeed, 
by conquering difficulties, but then in superfluous amount. When the peasant 
obtains good drinking water, e.g., by bringing it along a pipe to a house, it may 
occasion him a permanent expenditure of labour and costs for construction, 
upkeep, and management of the water-supply. But if this brings the water in 
greater quantity than he requires, it will not occur to the peasant, in spite of the 
labour, that he must "economise" the water. ,. / 




In asking what is the principle that regulates the amount of 
value, we pass to a sphere where lies the chief task of a theory 
of value, and where at the same time lie its greatest difficulties. 
These difficulties are the result of a peculiar coincidence of 
circumstances. From one point of view the true principle 
almost suggests itself. If the value of a good is its importance 
to human wellbeing, and if this " importance " means that some 
portion of our wellbeing is dependent on our having the good, 
it is clear that the amount of the good's value must be 
determined by the amount of wellbeing which depends on it. 
I Goods will have high value if our wellbeing depends on them 
/ to any important extent, low value if it does not. 

But from another point of view, there are certain facts in 
the economical world which seem to give the lie to this very 
simple and natural explanation. Everybody knows that, in 
practical economic life, precious stones possess a high value, 
while bread and iron have a moderate value, and air and water 
usually no value at all. Now everybody knows that without 
air and water we simply could not exist, and that the uses of 
bread and iron are extremely important, while precious stones, 
for the most part, only satisfy the love of ornament, and have, 
accordingly, a very inferior importance for human wellbeing. It 
would appear, then, that one who holds fast by the principle that 
the amount of a good's value is determined by the importance 
of the services which it may render to human wellbeing, must 
expect to find in precious stones a low value, in bread and iron 
a high value, and in water and light the very highest value. 
But facts show that exactly the opposite of this is the case. 

chap, in THE OLD PARADOX 139 

This startling phenomenon has been a veritable rock of 
offence in the theory of value. The highest utility accom- 
panied by the smallest value is a strange paradox. It is 
true that, in confusing Usefulness and Use Value, economists 
did not apprehend and describe the state of the case quite 
exactly. When they falsely ascribed to the iron a high " use 
value " and to the diamond a low " use value," the only 
reason for surprise was that the " exchange value " of these 
goods went so entirely in the opposite direction. But this was 
only to change the name of the opposition, not to take away 
any of its sharpness. There were plenty of attempts to bridge 
the fatal contradiction by involved explanations, but these were 
unsuccessful ; and so it happens that, from Adam Smith's time 
to our own, innumerable theorists have despaired of finding 
the nature and measure of value in any relation to human 
wellbeing, and have fallen back upon quite foreign and often 
wonderful lines of explanation, such as labour or labour time, 
costs of production, resistance of nature to man, and the like. 
But, unable to get rid of the feeling that the value of goods 
must have something to do with utility and human wellbeing, 
they put down the want of harmony between the utility and 
the value of goods as a rare and perplexing contradiction, a 
contradiction e'conomiquc. 

In what follows I mean to prove that the older theory had 
no need to abandon the most natural explanation. The 
measure of the utility which depends on a good is, actually 
and everywhere, the measure of value for that good. To prove 
this nothing more is necessary than a dispassionate but keen 
casuistical investigation into the question, What is the gain 
to our wellbeing that, in any given circumstances, depends on 
a good ? I say deliberately " casuistical " investigation ; for 
the entire theory of subjective value is, properly, nothing else 
than a system of casuistry, determining when, under what 
circumstances, and how far our wellbeing is dependent upon 
any particular good. It is very remarkable that the ordinary 
man in everyday life is constantly making casuistic distinc- 
tions of this kind, and making them with great certainty. 
He seldom makes a mistake, and he never makes a mistake in 
the principle. He may, of course, ascribe a trifling value to a 
diamond if he mistakes it for a glass bead. But the theoretical 

140 THE AMOUNT OF VALUE book in 

consideration — which is quite irrelevant here — that without 
water the human race could not continue in life, would never 
lead him to the casuistical conclusion that every gallon of 
water which flows from the village spring is a good of priceless 
value, or worth thousands of pounds. Our task, then, is to 
hold the mirror up to those casuistical distinctions which men 
make in the ordinary affairs of life, and to hring those laws, 
which the ordinary man instinctively handles with certainty, 
to clear and conscious presentation. 

What human wellbeing may gain from a good, and thus 
the advantage which is dependent on a good, is, in most cases, 1 
the satisfaction of a want. The casuistical consideration that 
really determines how far a person's wellbeing depends upon 
a particular good is found, in the answer to two questions : 
first, which, among two or more wants, depends on it ? and, 
second, what is the urgency of the dependent want or of its 
satisfaction ? 

For convenience we shall take the second question first, 
and answer it in the present chapter. It is a familiar fact 
that our wants vary very greatly in importance. We are 
accustomed to rank them according to the seriousness of the 
consequences which their non-satisfaction has on our wellbeing. 
Thus we attach the greatest weight to those wants the non- 
satisfaction of which would be followed by death. Next to 
these we place wants the non-satisfaction of which would 
result in some serious permanent injury to our health, honour, 
or happiness. Below these again come such wants as expose 
us to more temporary injuries, pain, or deprivations. Finally, 
we put in the very lowest class those wants the non-satis- 
faction of which costs us nothing more than a very slight 
unpleasantness, or the deprivation of some quite insignificant 
pleasure. Arranging our wants according to these characteristics 
we obtain a regularly graduated scale of wants. Of course 
as differences of bodily and mental disposition, culture, and so 
on, result in very marked differences of wants, this scale will 
come out very different for different individuals, and even for 
the same individual at different times. All the same, every 
practical man whose means are limited must have a scale 

On certain comparatively rare exceptions see Conrad's Jahrbiicher, vol. 
xiii. p. 42, 


more or less clearly before his mind if he would make a choice 
among these wants, and even theorists have often had occasion 
to sketch such a scale from the " objective " standpoint of 
impartial scientific consideration. 

So far everything would be simple and certain were it 
not that there is an ambiguity when we speak of graduation 
or ranking of wants. We may mean by these terms either 
the graduation of wants as kinds of wants, or the graduation 
of degrees of wants, the concrete individual feelings of want ; 
and these two are essentially different, even divergent. If 
we compare kinds of wants, looked at as a whole, according 
to their importance for human wellbeing, there is no doubt 
whatever that to the needs of subsistence would be allotted 
the first rank, to the needs of housing and clothing a rank 
not much inferior, to the wants satisfied by tobacco, spirituous 
liquors, music, etc., a very much less important place, while 
the wants of ornament and the like would have a very in- 
significant rank indeed. 

Now the graduation of concrete feelings of want is essen- 
tially different from this. Within one and the same kind of 
want the feeling of want is not always uniform, not always 
equally strong. Every feeling of hunger is not equally 
intense, and every satisfaction of hunger is not equally per- 
fect. In the class of " needs of subsistence," for instance, 
the concrete want of a man who has not eaten a morsel for 
eight days is infinitely more urgent than that of another man 
who has already got through two courses of his ordinary dinner, 
and is meditating whether he should have a third. In 
the graduation of concrete wants we have to deal with an 
entirely different state of affairs, and with a much greater 
variation. In the scale of kinds of wants the " needs of sub- 
sistence " came far and away before the desire for tobacco, for 
liquor, for ornament, etc. In the scale of concrete wants, 
wants belonging to the most various kinds cross and intersect 
each other. It is true that, even here, the most important- 
concrete wants in the most important classes of wants stand 
at the top of the scale ; but the less important concrete wants 
of these classes are frequently overpassed by concrete wants 
of much inferior classes — the bottom members of the highest 
class, perhaps, overpassed by the top member of the lowest 

142 THE AMOUNT OF VALUE book in 

class. It is very much the same as if a geographer were one 
time to arrange the Alps, Pyrenees, and Harz by their height 
as mountain ranges, and another time were to arrange their 
single summits. As ranges the Alps would, of course, come 
before the Pyrenees, and the Pyrenees before the Harz. But, 
in comparing individual heights, a great many of the Alpine 
summits would take rank below individual peaks of the 
Pyrenees, some even below hills in the insignificant Harz. 

And now the question is, When goods have to be valued, 
by which scale shall we measure the importance of the wants 
they subserve — the scale of kinds or the scale of concrete 
wants ? When the older theory came to this dividing of the 
ways — the very first opportunity offered it of making a mis- 
take — it chose the wrong way. It adopted the scale of kinds. 
On this scale the class " Needs of Subsistence " occupies one of 
the most conspicuous places, while the class "Desire of Orna- 
ment " has a subordinate place. Thus the older theory decided 
that bread, universally, has a high " use value," and diamonds 
a low "use value," and, naturally, was very much astonished 
that the value practically put upon those two kinds of goods 
was exactly the reverse of this. 

Now their conclusion was quite wrong. What the casuist 
must say to himself is : If I have a slice of bread I can indeed 
still this or that concrete feeling of hunger as it arises, but I 
can never satisfy the totality of such feelings — the actual and 
possible, present and future, feelings of hunger which, together, 
make up the kind " needs of subsistence." Obviously, then, it 
is quite out of place to attempt to measure the service which 
the piece of bread can. render me by the fact that the totality 
of such feelings possesses much or little importance. To do 
so would be like the act of a man who, on being asked 
as to the height of the Kahlenberg, an insignificant off-shoot 
of the Alps near Vienna, were to ascribe to it the height of 
the Alpine chain ! As a fact it would never occur to us 
in practical life to value every bit of bread in our posses- 
sion as a treasure of infinite importance. We do not rejoice 
every time we buy a baker's roll as if we had saved a life, 
nor do we blame a man as spendthrift when he carelessly 
gives away a slice of bread or throws it to a dog. Yet this 
is the judgment we must pass if we would transfer the import- 


ance of the kind " needs of subsistence," on the satisfaction of 
which our very life depends, to the goods which actually 
minister to that satisfaction. 

This much is clear, then, that the value we ascribe to goods 
has nothing to do with the graduation of kinds of want, but 
only with the graduation of concrete wants. In order to bring 
out all that is involved in this conclusion, it may be desirable 
to put more clearly certain points relating to the composition 
of this graduated scale, and to put the whole argument on a 
surer basis than has been done in the foregoing analysis. 

Most of our wants are divisible, in the sense that they are 
susceptible of piecemeal satisfaction. When hungry I am not 
compelled to choose between satisfying my hunger completely 
and going entirely unsatisfied. I may take the edge off my 
appetite by a moderate meal, intending, perhaps, to dispel the 
feeling of hunger altogether later on by a full meal, or, perhaps, 
to make shift with the partial satisfaction I have got. Naturally 
the partial satisfaction of a concrete want has another and a 
smaller importance for my wellbeing than a complete satis- 
faction of the same ; and, to a certain extent, this of itself would 
suffice to call attention to the above-mentioned phenomenon 
that, within a kind of wants, there are concrete wants (or 
degrees of want) of varying importance. But with this is 
connected a further notable fact. It is an experience, as 
familiar as it is deep-rooted in human nature, that the same 
enjoyment, when constantly repeated, gives us, beyond a certain 
point, a constantly decreasing gratification, till, in the end, it 
changes into its opposite. Any one can prove for himself 
that at a meal when the fourth or fifth course is reached, the 
appetite is not nearly so keen as at the first course, and that, 
if there are too many courses, a point is reached where enjoy- 
ment turns into discomfort or disgust. The same occurs in 
too long a concert, lecture, walk, play, and, generally speak- 
ing, in the case of most physical as well as intellectual 

If we put the essence of these well-known facts into 
technical language we get the following proposition : The con- 
crete degrees of want into which our sensations of want may 
be divided, or the successive degrees of satisfaction obtained 
from similar amounts of goods, are usually of very dissimilar 

144 THE AMOUNT OF VALUE book hi 

importance — indeed, of importance which diminishes step by 
step to zero. 

This will explain a whole series of propositions which were 
simply asserted above. It explains, firstly, how, in one and 
the same kind of wants, there may be concrete wants, or degrees 
of want, of varying urgency. Indeed in the case of all divisible 
satisfactions as the term is defined above — that is, in the great 
majority of cases — this not only may be but must be so, quite 
normally and, so to speak, organically. It explains, again, that, 
even in the most important kinds of wants, there are lower and 
lowest grades of importance. Properly speaking, the more 
important kind is marked off from the less important only by 
the fact that, to some extent, its head rises higher than the 
others, while its base stands on the same level as all the others. 
And, finally, it explains that, not only may it occasionally 
happen, as I have just said, that a concrete want belonging to 
a kind which, on the whole, is more important, may be out- 
weighed by some individual concrete want of a kind, on the 
whole, less important, but that this happens as a perfectly 
normal, ordinary, and organic occurrence. There will always, 
for instance, be innumerable concrete subsistence wants which 
are weaker and less urgent than many a concrete want of quite 
unimportant classes ; such things as the desire of ornament, the 
love of dancing, the craving for tobacco, etc., will often be stronger 
than the need of good food and warm clothing. 

If we try to represent the classification of our wants by a 
typical scheme we must, on the principles just laid down, give 
it something like the following shape r : — 



























































1 See Menger's G-rundsdtze der Volksvnrthschaftslehre, p. 93. 

chap, in A TYPICAL SCHEME 145 

In this scheme the Roman figures indicate the various kinds 
of wants, decreasing in order of importance from I to X. I 
indicates the most urgent kind, say the needs of subsistence ; 
V indicates a kind of medium importance, say that of spirituous 
liquors ; while X indicates the least important conceivable 

The Arabic figures 10 to 1, again, indicate the concrete 
wants and degrees of want that occur in the different kinds, 
their rank being shown by assigning the figure 10 to the 
most important conceivable want, the figure 9 to that next in 
importance, and so on, till the last figure 1 indicates the most 
insignificant want likely to occur. 

This scheme now puts before us the fact that the more 
important the kind, the higher stands the most important 
concrete want contained in the kind ; but it shows at the 
same time that in each kind there are all grades of importance, 
from greatest to least. The only exceptions in the scheme 
occur in classes IV and VII, in which some individual members 
of the descending scale are wanting. These represent the 
(comparatively rare) kinds where, on technical grounds, a 
successive satisfaction by means of partial acts is either incom- 
plete or quite impossible, and where, accordingly, the want 
must either be entirely satisfied or not satisfied at all. The 
want met by kitchen ranges, for instance, is generally met so 
completely by one range that we should have absolutely no 
use for a second. Finally, the scheme shows that in the most 
important kind (I) there occur concrete wants, which bear the 
lowest figure of importance, while, in almost all the other 
kinds which stand under it in importance, there are concrete 
wants that bear higher figures. 




Turning now to the second' question suggested in last chapter 
we ask, Of several or many wants which one is it that actually 
depends on a particular good ? 

This question would not be put at all if the circumstances 
of economic life were so simple that single wants always 
stood over against single goods. If a good were adapted 
to satisfy a single concrete want, and if it were at the same 
time the only one of its kind, or, at least, the only one of 
its kind available, it would be quite clear without further 
consideration that the satisfaction of the single want depended 
on our command over the single good. But in practical life 
the matter is scarcely ever so simple as this ; on the contrary, 
it is usually complicated simultaneously from two sides. First, 
one and the same good is usually adapted to satisfy various 
concrete wants, which wants again possess various degrees of 
importance ; and second, several goods of one and the same 
kind are frequently available, thus leaving it to caprice which 
good will be used for the satisfaction of an important, and 
which for an unimportant want. To give the simplest possible 
example. I have been shooting for a few days on the mount- 
ains, and by some accident I miss my companions. I am far 
from any house or village, and the only food I have for myself 
and my dog is two entirely similar baker's rolls. It is clear that 
the satisfaction of my hunger is of infinitely more importance to 
me than the satisfaction of the dog's hunger and it is just as clear 
that it lies with me which of the two rolls I shall consume and 
which I shall give to the dog. And now the question arises, 
Which of the two wants here is dependent on the bread ? 


One is tempted to answer, That want to which the bread 
was actually devoted. But it is evident at once that this is 
an erroneous conclusion. It would amount to saying that the 
two rolls, devoted as they are to the satisfaction of wants of 
different importance, must possess different values ; while it 
does not admit of question that two similar goods, available 
under similar conditions, must be entirely equal in value. 

Here, again, an easy casuistical consideration gives the 
proper solution. The problem is : Which, among several 
wants, is dependent on a commodity ? This resolves itself 
very simply when it is known which want it is that would fail 
of its satisfaction if that commodity were not present : that 
want is evidently the dependent one. And now it is easy to 
show that the want which failed of its satisfaction would not 
be that want which the particular commodity was, accidentally 
and capriciously, selected to satisfy, but would always be the 
least important among all the wants in question ; that is to say, 
among all those wants which would formerly have been pro- 
vided for out of the total stock of this class of goods. 

Consideration for one's own convenience, as obvious as it 
is imperative, induces every reasonable man who acts economic- 
ally to maintain a certain fixed order in the satisfaction of 
his wants. No one would be so foolish as to exhaust the 
resources at his command in satisfying trifling wants, or wants 
that could be easily ignored, and thus to deprive himself of 
the means of satisfying necessary wants. On the contrary, 
every one would take care to use the resources at his command, 
in the first instance, to provide for his most important wants; then 
for wants that come after these in importance ; then for those of 
the third rank, and so on ; — always arranging in such a way 
that the lesser wants were only provided for when all the higher 
wants had been supplied, and there still remained some means of 
satisfaction to spare. We act according to the same obvious 
and reasonable principles when our stock undergoes a change 
by the loss of one member of that stock. Naturally this will 
alter the plan according to which we have been employing our 
resources. Not all the wants we had arranged to satisfy can 
now be provided for, and some abatement in the totality of 
satisfaction is unavoidable. But, of course, the wise man will 
try to lay the burden on the least sensitive spot ; that is to say, 



if the loss chances to be in a commodity which was destined 
to a more important use, he will not give up the satisfaction 
of this more important want, and, by holding on obstinately 
to his old plan, provide satisfaction for the less important 
wants. We may be sure that he will satisfy the more 
important want, and will do so by withdrawing provision from 
that want, among all the wants hitherto marked out for 
provision, on the satisfaction of which least depends. To put 
it in terms of our former illustration : if our sportsman loses 
the roll which he has meant for himself, he will scarcely feed 
his dog with the one that remains, and expose himself to the 
danger of starving. He will suddenly change his plan, elevate 
the roll that remains into fulfilling its more important function 
only, and shift the loss to the least important function, the 
feeding of the dog. 

The case, then, stands as follows. Wants which are more 
important than this " last " want will not be affected by the 
loss of the good, for their satisfaction is, as before, guaranteed 
in case of need by the replacement of substitutes. Nor will 
those wants be affected which are less important than this 
" marginal want," for they go unsatisfied whether the good is 
there or not. The only want affected is the last of those that 
otherwise would be satisfied : it will be satisfied if the good is 
there ; it will not be satisfied if it is not there. It is thus the 
dependent want we were seeking. 

Here then we have reached the goal of the present inquiry, 
and may formulate it thus : the value of a good is measured 
by the importance of that concrete want, or partial want, which 
is least urgent among the wants that are met from the avail- 
able stock of similar goods. What determines the value of a 
good, then, is not its greatest utility, not its average utility, 
but the least utility which it, or one like it, might be reason- 
ably employed in providing under the concrete economical 
conditions. To save ourselves the repetition of this circum- 
stantial description — which, all the same, had to be somewhat 
circumstantial to be quite correct — we shall follow Wieser x 

1 Ueber den Ursprung und die ffauptgesetze des wirthschaftlichen Wertfus, 
p. 128. Jevons lias the expressions "final degree of utility " and "terminal 
utility." With Menger," who first formulated the above law with entire clear- 
ness, but gets along without the convenience of a short technical expression, 


in calling this least utility — the utility that stands on the margin 
of the economically permissible — the economic Marginal Utility 
of the good. The law which governs amount of value, then,; 
may be put in the following very simple formula : TT>p. valno 
of a good jg fWprn-n^pd by tlia nvrmmrt. nf its Marginal Utility, 1 

This proposition is the key-stone of our theory of value. 
But it is more. In my opinion it is the master-key to the 
action of practical economic men with regard to goods. In the 
simplest cases, as in all the tangle and complication which our 
present varied economic life has created, we find men valuing 
the goods with which they have to deal by the marginal utility 
of these goods, and dealing with them according to the result 
of this valuation. And to this extent the doctrine of marginal 
utility is not only the key-stone of the theory of value, but, 
as affording the explanation of all economical transactions, 
it is the key-stone of all economical theory 1 Those who 
have observed practical life closely will, I think, be convinced 
that this claim is not exaggerated. Eightly to observe 
and rightly to interpret what has been observed, however, is 
an art not always easy ; and in what follows accordingly we 
shall make use of the value theory to guide us in observing 
and interpreting what falls within its sphere. We begin, then, 
with an illustration of the greatest conceivable simplicity. 

A colonial farmer, whose log-hut stands by itself in the 
primeval forest, far away from the busy haunts of men, has 

the law runs as follows (p. 98) : " In every concrete case, accordingly, of the 
satisfactions of want guaranteed by the total quantity of goods, it is only those 
which have the smallest importance for the person that are dependent on his 
command over a definite part-quantity of the amount of goods at his disposal ; 
and the value of a part-quantity of the available amount of goods is, accordingly, 
equal to the importance which the satisfactions of want that arc least urgent 
among all the satisfactions guaranteed by the total quantity, and obtainable 
with a similar part-quantity, have for that person." 

1 Even where men do not act egoistically but altruistically, they have occasion 
to consider the marginal utility, viz. that marginal utility which the goods given 
away have to the persons who get them. One gives donations, charities, and the 
like, when the importance of such, measured by their marginal utility, is very much 
higher as regards the wellbeing of the receiver than as regards that of the giver, 
and almost never when the converse is the case. I am glad to know that, in the 
idea expressed above, I am at one with so distinguished an economist as Walras. 
I can only express my entire concurrence with what he says, in the preface to his 
Theoric de la Monnaie, p. 11, as to the universal importance of the idea of marginal 
utility, both as regards theory and as regards the practice of economic life. 


just harvested five sacks of corn. These must serve hirn 
till the next autumn. Being a thrifty soul he lays his plans 
for the employment of these sacks over the year. One sack 
he absolutely requires for the sustenance of his life till the 
next harvest. A second he requires to supplement this bare 
living to the extent of keeping himself hale and vigorous. 
More corn than this, in the shape of bread and farinaceous food 
generally, he has no desire for. On the other hand, it would 
be very desirable to have some animal food, and he sets aside, 
therefore, a third sack to feed poultry. A fourth sack he 
destines for the making of coarse spirits. Suppose, now, that 
his various personal wants have been fully provided for by this 
apportionment of the four sacks, and that he cannot think of 
anything better to do with the fifth sack than feed a number 
of parrots, whose antics amuse him. Naturally these various 
methods of employing the com are not equal in importance. 
If, to express this shortly in figures, we make out a scale of 
ten degrees of importance, our farmer will, naturally, give 
the highest figure 10 to the sustenance of his life; to the 
maintenance of his health he will give, say, the figure 8 : then, 
going down the scale, he might give the figure 6 to the im- 
provement of his fare by the addition of meat, the figure 4 to 
the enjoyment he gets from the liquor, and, finally, to the 
keeping of parrots, as expressing the least degree of importance, 
he will give the lowest possible figure 1. And now, putting 
ourselves in imagination at the standpoint of the farmer, we 
ask, What in these circumstances will be the importance, as 
regards his wellbeing, of one, sack of corn ? 

This, as we know, will be most simply tested by inquiring, 
Hdw much utility will he lose if a sack of corn gets lost ? 
Suppose we carry out this in detail. Evidently our farmer 
would not be very wise if he thought of deducting the lost 
Sack from his own consumption, and imperilled his health and 
life while using the corn as before to make brandy and feed 
parrots. On consideration wc must see that only one course 
is conceivable : with the four sacks that remain our farmer 
will provide for the four most urgent groups of wants, and 
give up only the satisfaction of the last and least important, 
the marginal utility — in this case, the keeping of parrots. The 
only difference, then, that his having or not having the fifth 

chap, iv THE SACKS OF CORN 151 

sack of corn makes to his wellbeing is that, in the one case, 
he may allow himself the pleasure of keeping parrots, in the 
other he may not ; and he will rightly value a single sack of 
his stock according to this unimportant utility. And not 
only one sack, but every single sack ; for, if the sacks are 
equal to one another, it will be all the same to our farmer 
whether he lose sack A or sack B, so long as, behind the one 
lost, there are still four other sacks for the satisfying of his 
more urgent wants. 

To vary the illustration, assume that our farmer's wants 
remain the same, and that he has only three sacks of grain. 
What now is the value of one sack to him ? The test again 
is quite easily applied. If he has three sacks he can and will 
provide for the three most important groups of wants. If he 
has only two sacks, he will be obliged to limit himself to the 
satisfying of the two most important groups and give up the 
satisfying of the third, that of animal food. The possession of 
the third sack — and the third sack, be it remembered, is not 
a definite sack but any of the three sacks, so long as there are 
other two behind it — directly carries with it, therefore, the 
satisfaction of his third most important want ; that is, the last 
or least of those wants covered by the three sacks which 
constitute his total stock. Any estimate other than that 
according to the marginal utility would, in this case also, 
obviously run counter to facts, and would be quite incorrect 

Finally, suppose that our farmer's wants remain as before, 
and that he only possesses one single sack of corn. In this 
case it is perfectly clear that all less important methods of 
employing the corn are out of court, and that it will be devoted 
to and spent in sustaining the farmer's life — a function for 
which it just suffices. And it is as clear that if this single 
sack fails the farmer will no longer be able to support himself 
in life. His possession of the sack, therefore, means life ; his 
loss of it means death ; the single sack of corn has the greatest 
conceivable importance for the wellbeing of the farmer. And 
all this is still in conformity with our principle of marginal 
utility. The greatest utility — the preservation of life — is here 
the sole, as well as the last or marginal utility. 

These estimates according to marginal utility are not merely 
" academic." No one will doubt that our farmer <>n due occasion 


— say, on an offer made him for the corn — would act practi- 
cally according to the same estimates. Any one of us, placed 
in his position, would undoubtedly be inclined to let one of the 
five sacks go pretty cheap in consideration of and in correspond- 
ence with its small marginal utility. He would charge con- 
siderably more for one of the three sacks. And he would 
not let the irreplaceable single sack, with its enormous marginal 
utility, go for any price whatever. 

Transfer, now, the field of illustration from the solitary in 
the primeval forest to the bustle of a highly organised economic 
community. Here we encounter, in an altogether dominating 
position, the empirical proposition that quantity of goods stands 
in inverse ratio to value of goods. The more goods of one 
kind there are in the market, the smaller, ceteris paribus, is the 
value of the single commodity, and vice versd. Every one 
knows that economic theory has made use of this empirical 
proposition — the most elementary proposition in the doctrine 
of price — to establish the law of " Supply and Demand. ' But 
this proposition maintains its validity quite apart from exchange 
and price. For instance, how much more value does a collector 
put upon the single specimen, which represents a class in his 
collection, than upon one of a dozen of such specimens ? It 
is easy to show that well-authenticated facts of experience like 
these follow, as a natural consequence, from our theory of 
marginal utility. The more individual goods there are avail- 
able in any class, the more completely can the wants to which 
they relate be satisfied, and the less important are the wants 
which are last satisfied — those whose satisfaction is imperilled 
by the failure of one of the goods. In other words, the more 
individual goods there are available in any class, the smaller 
is the marginal utility which determines the value. If, again, 
there are available so many individual goods of one class 
that, after all the wants to which they are relative are com- 
pletely satisfied, there still remains a number of goods for 
which no further useful employment can be found, then the 
marginal utility is equal to zero, and a commodity of that 
particular class is valueless. 

Here, then, we have an entirely natural explanation of the 
phenomenon which originally struck us as so surprising, that 
comparatively " useless " things, such as pearls and diamonds, 


have so high a value, while infinitely more " useful " things, 
like bread and iron, have a far less value, and water and air 
no value at all. Pearls and diamonds are to be had in such 
small quantities that the relative want is only satisfied to a 
trifling extent, and the point of marginal utility which the 
satisfaction reaches stands relatively high. 1 Happily for us, 
on the other hand, bread and iron, water and light, are, as a 
rule, to be had in such quantities that the satisfaction of all 
the more important wants which depend on them is assured 
Only very trifling concrete wants, or no wants at all, are 
dependent, for instance, on the command over a piece of bread 
or a glass of water. It is, of course, true that in abnormal 
circumstances — as, for instance, in besieged towns, or in desert 
journeys, where water and food are scarce, and small stores 
only suffice to meet the most urgent concrete wants of meat 
and drink — the marginal utility flies up. According to our 
principles the value of those goods, otherwise of so little 
account, must rise also, and the inference finds ample empirical 
confirmation in the enormous prices paid in such circumstances 
for the most wretched means of subsistence. Thus those very 
facts which, at first sight, seemed to contradict our theory that 
the amount of value is dependent on the amount of utility 
conditioned, on closer examination afford a striking confirma- 
tion of it. 

1 To guard against possible confusion it should be noted that the German 
writers on value generally speak of "satisfaction of want" under the metaphor 
of a descending scale : the increasing satisfaction creeps down the scale, and the 
point of saturation is zero, not 100. — W. S. 



The cases we have hitherto considered have been comparatively 
easy of interpretation ; but practical economic life brings out a 
great many complications which the practical man treats with 
easy assurance, but the theorist finds considerable difficulty in 
explaining. 1 To understand these everything depends on the 
correctness of our casuistical decision as to that amount of 
utility which, in the given circumstances, is the marginal 
utility. For this purpose the following general direction may 
serve as master-key to all the more difficult problems of value. 
We must look at the economic position of the person who is 
estimating the value of a good from two points of view. First, 
we must in thought add the good to his stock, and consider 
what further and lesser concrete wants can novj be satisfied. 
Second, we must in thought deduct the good from his stock, 
and consider again what concrete wants will still be satisfied. 
In the latter case, of course, it becomes manifest that a certain 
layer of wants, viz. the lowest layer, has lost its former pro- 
vision ; this lowest layer indicates the marginal utility that 
determines the valuation. 2 

1 On the relation of theory and practice in the sphere of valuation see 
Conrad's Jahrbucher, vol. xvi. p. 74. 

1 Generally speaking, there are two occasions on which a man is called on to 
form a judgment as to value. One is on parting with a good in his possession, 
e.g. in giving it away, or exchanging, or consuming it ; the other, on acquiring a 
good. In the two cases the form which the valuation assumes in thought is, 
externally, a little different. A good which a man has he valuee according to the 
injury which he would suffer by its loss ; he values it, therefore, according to the 
last satisfaction which is assured him by having it. A good which a man has not 
he values, on the contrary, according to the increment of utility which its acquisi- 
tion brings ; i.e. according to the most urgent among those satisfactions which, 


The first very obvious but, theoretically, not unimportant 
application, leads us to recognise that in valuing a good some- 
times it is the importance of some one individual concrete want 
that is taken into consideration, sometimes it is the import- 
ance of many concrete wants that has to be summed up. That 
is to say, in the nature of things the layers of want that 
depend on the object we are valuing may turn out to be very 
various, in compass and extent, according to the constitution of 
that object. If it is a single individual of a perishable group 
of goods, for instance a food, the marginal utility will usually 
include no more than one single concrete want, or even a 
partial want. If the object, again, is a durable good, and thus 
susceptible of repeated acts of use, or if it is a number of goods 
considered as a whole, it is natural that an entire sum — in 
certain circumstances, a very great sum — of concrete wants may 
be included in the layer of wants that depends on it. On the 
possession or non-possession of a piano, for instance, depend 
hundreds of musical enjoyments ; on the possession of a cask of 
wine hundreds of pleasures of the palate ; and the importance 
of those pleasures naturally must be summed up in valuing 
these goods. 1 

To pass on now to another far-reaching complication. It 
follows from our earlier analysis that the marginal utility 
which determines the value of a good is not (or is only acci- 
dentally) identical with the utility which the good itself 
actually affords. 2 As a rule, the marginal utility of any good is 
a foreign utility, the utility of the last individual good (or of 
the last similar part, which may be taken to replace it. In 
simple cases this utility, although the utility of another good, 
is at the least the utility of a good of the same kind. In the 
illustration already made use of, the value of each individual 

in the conditions of his fortunes up till the present time, he has not been able to 
obtain. Naturally we get the same result by either method, for the final satis- 
faction which is assured by a good is always identical with the first which would 
be lost without the good. In the text I have put the formula in such a way 
that it will sufficiently embrace either method. 

1 On certain far-reaching complications which may be connected with this, 
see Conrad's Jahrbucher, vol. xvi: p. 34. 

2 The latter occurs only with individual goods, or with those particular 
goods which may have chanced to be selected just for the most insignificant 

156 COMPLICATIONS book in 

sack of corn — and therefore the value, for instance, of the first 
sack — was determined by the utility of another, the last sack 
of corn, but always by the utility of a sack of corn. The 
existence of organised exchange, however, may cause consider- 
able complications here. In making it possible to exchange 
goods of one kind, without loss of time, for goods of another 
kind, it also makes it possible to shift a loss, which occurs in 
one kind of goods, over to another kind. Instead of replac- 
ing the loss of an individual good by withdrawing another 
good of the same kind from a less important employment, 
and leaving there a vacancy, we may summon goods of 
entirely different kinds from the occupation in which they 
have previously been employed, and, by way of barter, procure 
the good required to supply the loss. AY hat is here lost in 
losing a good of class A is really the utility which the goods 
taken from class B would otherwise have afforded ; and since, 
of course, we should not think of taking the replacing good 
from the more important but from the least important employ- 
ments in their spheres of utility, the loss comes upon the 
marginal utility of the foreign good, that transferred from class 
B to class A. Here, therefore, the marginal utility and the 
value of a good of one kind is measured by the marginal 
utility of a good of another kind — by the good (or portion of 
goods) devoted to replace it. 

To illustrate this. My only overcoat has been stolen. 
There is no question of replacing it directly by another coat of 
the same kind, because I had only the one. But, all the 
same, I shall not willingly let the loss caused me by the theft 
rest where it originally fell. For the want which now makes 
itself felt — that of warm winter clothing — is a very urgent 
one ; its non-satisfaction may involve the most serious conse- 
quences to my health, and even endanger my life. I shall 
accordingly try to shift the incidence of the loss on to other 
kinds of goods, and I shall do so by parting, in exchange for a 
new overcoat, with goods which, in other circumstances, would 
have been put to other uses. The goods needed for this ex- 
change I shall, naturally, withdraw from those uses which are 
of least consequence to me ; that is to say, I shall take the 
goods which are of least marginal utility to me. If I am well 
off I shall probably take the £3, the price of a new greatcoat, 


out of my cash-box, and I shall be able to buy oue luxury the 
less with my diminished funds. If I am not well off, but am 
not exactly a poor man, 1 shall have to fill up the deficit in 
the cash-box by economising on my house-keeping expenses 
for a couple of months. If I am so poor that I neither have 
the money nor can save it out of my monthly income, I may 
have to sell or pawn some articles of furniture which can be 
most easily dispensed with. Finally, if I am so far reduced 
that I can provide only for the most urgent concrete 
wants in all the other classes, then I cannot shift the loss to 
other classes of wants, and needs must get along without an 

If we put ourselves for the moment into the position of 
the owner of the overcoat, and ask what it is, as regards his 
wellbeing, that depends on the coat being stolen or not, we 
shall find that the dependent circumstance is, in the first 
case, the spending of money on some luxury ; in the second, 
some little curtailments in house-keeping; in the third, de- 
privation of the utility of the goods sold or pawned ; in the 
fourth, the actual preservation of health. Only in the last 
case, therefore, is the value of the coat determined by the 
immediate marginal utility of its own class (which marginal 
utility, here happens to coincide with the utility of the good 
itself because the class is represented by a single individual) ; 
in all the other cases it is determined by the marginal utility 
of foreign classes of goods and wants. 

Under the present economic system, where exchange is 
very highly organised, a notable importance attaches to the 
casuistical modification we have just described. We might 
almost say that it includes the majority of subjective estimates 
of value. For reasons which may be easily inferred from 
what has been said, we scarcely ever value goods that 
are indispensable to us by their direct utility, but, almost 
always, according to the "substitutionary utility" of foreign 
classes of goods. I should say, however, emphatically that,| 
even where exchange is most highly organised, we do not 
always have occasion to employ this latter method of valuation ; 
it is only under certain conditions, although of course con- 
ditions that very often occur. That is to say, we employ the 
" substitutionary " method only when the marginal utility of 


the replacing good is less than the immediate marginal utility 
of the class into which it is transferred ; to put it more 
exactly, when the prices of goods, and, at the same time, the 
circumstances of provision for the various kinds of wants, are 
such that, if a loss occurring in one kind were borne inside the 
kind itself, wants relatively more important would go unsatisfied 
than if the purchase price of the replacing good were drawn 
from other kinds of wants. But through all complications it 
is always the least utility, mediately or immediately dependent 
on a good, that determines its true marginal utility and value. 

Casuistical complications similar to those made possible by. 
exchange may be caused by the fact that replacing goods can 
be quickly obtained by production. This kind of complication 
also has a very notable place in the theory of value, from the 
fact that it gives the key to the influence of cost of production 
on value. It requires, on that account, particularly careful 
treatment. But it will be more appropriate to give an inde- 
pendent consideration to this and to certain other casuistical 
complications somewhat later, and to return meantime to the 
simple fundamental law, the statement of which requires to be 
supplemented in a particular direction. 



Thus far we have traced the amount of value which goods 
possess to the amount of their marginal utility. We may, 
however, pursue the causes which determine value one step 
farther back, and ask on what circumstances the amount of this 
marginal utility itself depends. The answer is ; — on the rela- 
tion between Wants and their Provision. The way in which 
these two factors influence the amount of marginal utility has 
been suggested so often and so fully in the foregoing analysis, 
that I need not say anything further in way of explanation. 
I shall content myself with shortly formulating the law relating 
to it. It runs thus : th ft : more_ comprehens ive- ami Lhe more 
iptiaa w frV i rv - urflr i^ fchfi : hurhiar. th p. marginal ut i lity , and vice versd: 
That is to say, the more numerous and the more intense the 
wants demanding satisfaction on the one hand, and the less the 
quantity of goods available to satisfy them on the other hand, 
the more important are the layers of want that must remain 
unsatisfied, and the higher, therefore, the marginal utility. 
And conversely, the fewer and the less urgent the wants, 
and the more goods there are to satisfy them, the deeper 
down the scale goes the satisfaction, and the lower falls the 
marginal utility and the value. It comes nearly to the 
same thing, only in a less precise form, to say: Usefulness 
and Scarcity are the ultimate determinants of the value 
of" goods. In so far as the degree of usefulness indicates 
whether, in its way, the good is capable of more or less 
important services to human wellbeing, so far, at the same 
time, does it indicate the height to which the marginal utility, 
in the most extreme case, may rise. But it is the scarcity 


that decides to what point the marginal utility actually does 
'rise in the concrete case. 1 

1 In his recently published essays on Wcrtlitheuricn unci JFcrtJogesetze (Conrad's 
Jahrbiicher, N. F., vol. xvi. pp. 417-437, and 513-562) Scharling will not allow- 
that the relation of Wants and Provision is the ultimate universal determinant of 
the value of goods, and would substitute Difficulty of Attainment in its place 
(ibid. p. 425, and particularly p. 430 in note, and p. 551). Notwithstanding 
some striking things in it I frankly confess — and all the more frankly that I 
rittach so much scientific importance to the Danish economist, and so much 
weight to anything he says — that I consider not only this proposition, but the 
whole treatise he has written in its proof, as a lamentable relapse in scientific 
analysis. Scharling has done everything possible to re-entangle certain things 
that had up till now scarcely escaped from confusion. And what makes it worse 
is that he has done it with skill, and with a certain semblance of truth. I con- 
sider " difficulty of attainment " one of those unlucky catch-words which can be 
stretched and stretched like an indiarubber band ; it leads out of one ambiguity 
into another, and it either explains things falsely or does not explain them at all. 
I mean that either one connects with it a definite, limited, and narrow meaning, 
and holds fast by that — in which case the explanations that one would base on 
this narrow conception prove to be positively false ; or one draws and stretches 
the rubber band, and, by making perverted and violent constructions, forces all 
sorts of foreign things under the elastic — in which case we avoid open contra- 
diction, but at the cost of making the proposition expressed by the catch-word 
an insipid and weak phrase, which does not explain, but goes round about an 
explanation. And just this has been Scharling's fate. What does he mean by 
"difficulty of attainment" ? He explains it as the amount of effort that every 
one must take on himself to obtain a good, or the effort which is spared him by 
the possession of the good (p. 430). And what does the word "effort," again, 
mean ? If any precise conception is to be attached to it, it can scarcely be under- 
stood as anything else than as some sort of exertion, pain, or labour. But if this 
is the meaning attached to it then the appeal to "saved effort," as the principle 
of the value of goods, is positively false. To give one example out of a thousand, 
take ths case of a pensioner past work with an income of / 60. He is told to 
value the overcoat which he possesses according to " saved effort." What kind of 
effort may that be ? Perhaps the effort which he would have to expend to produce 
the overcoat himself? Certainly not ; he would never himself make the coat, but 
al ways buy it. Or the effort which he would have to put forth if he were to pro- 
duce those goods which he had to give away as equivalent for the coat ? Neither 
can this be the case ; for, past work as he is, he would never acquire this purchase 
price through effort, but simply take it from his income, and for that, of course, 
he must curtail the satisfaction of other less important wants. What, therefore, 
the possession of the overcoat spares him is not an effort, but a deprivation, and 
a deprivation the amount of which, as I have indicated in the work disputed by 
Scharling, depends exactly on the importance of those last needs which are satis- 
fied by the good, which lose their satisfaction in losing it, and the urgency of 
which itself, again, is determined by the existing relation of Wants and Provision. 
It is only in those rare cases mentioned by me in Conrad's Jahrbiicher (ibid. p. 42) 
— the exceptional character of which I most distinctly maintain in spite of 
Scharling's remarks (p. 430, note 1) — that the amount of an effort or the pain of 
labour can be the immediate standard of value. — Now I admit that Scharling 


This proposition, that the height of marginal utility is 
determined by the relations of Wants and Provision, admits of 
a great number of useful applications. Just now I shall only 
emphasise two of these, which we shall have to make vise of 
later on in the theory of objective exchange value. First, since 
the relations of Wants and Provision among individuals are 
extremely various, one and the same good may possess an 
entirely distinct subjective value for different persons — without 
which, indeed, it is difficult to see how there could be any 
exchanging at all. And thus, second, under otherwise similar 
circumstances, the same quantities of goods have a different 
value to rich and poor ; to the rich they have a smaller, to the 
poor a larger value. The rich being amply supplied with all 
classes of goods, their satisfaction extends, generally speaking, 
to the more unessential wants, and the added or deducted satis- 
faction dependent on any particular good is, consequently, 
inconsiderable ; while to the poor man, who is generally able 
to provide for only his most urgent wants, the utility which 
depends on each good is much greater. Experience also 
shows that poor men find it a pleasant thing to acquire goods 
and a painful thing to lose them, where a similar gain or loss 
does not affect the rich at all. We would scarcely compare 
the state of mind of a poor clerk, who received his month's 
salary of' £5 on the first day of the month and lost it on his 
way home, with that of the millionaire who dropped the same 
sum. To the former the loss would mean most painful priva- 
tion over a whole month ; to the latter it would only involve 
the want of some idle luxury. 

sometimes give? the word "effort " quite another meaning from that of a pain. 
To avoid repetitions, however, I will show what that leads to, a little later, under 
the theory of price. — Finally, the illustration, with which Scharling thinks he 
has signally refuted my doctrine, will not mislead any one who has rightly under- 
stood the doctrine of marginal utility. If a boy, who hitherto had only had a 
single apple, were allowed for once to pull as many apples as he liked in a 
neighbour's garden, he would, I admit, immediately reduce the value he put upon 
the good called "apple." But why ? Not, as Scharling thinks he may assume as 
self-evident, because " his relish and his enjoyment in consuming the fruit remain 
unchanged." This enjoyment may run down a whole graduated scale from the 
consumption of the first and single apple to entire satiation with apples, but it is 
perfectly clear that the boy with the single apple sacrifices the enjoyment which 
stands highest in this scale, while, " with one of many apples to choose from," he 
sacrifices only a very trifling one. 





In the present and following chapters of this book we shall 
continue the discussion of various casuistical complications 
which arise in practical life in the formation of value. We 
must go into these for two reasons : first, in order to put on 
a surer foundation the perfect agreement of our theory of 
value with the phenomena of actual life, and, second, because 
the conclusions arrived at now will find important applications 
later when we come to the theory of capital. 

It often happens that a commodity permits of being 
employed or used in two or even several entirely different ways. 
Wood, for instance, can be used for burning or for building ; 
grain for bread, for seed, or for distilling ; salt as a relish, or 
as an auxiliary material in the making of chemicals. Since, 
then, in each different employment the commodity supplies 
different wants, and these wants have, of course, different 
degrees of importance; since, further, in these different classes 
of wants, the relations of want and its provision are frequently 
dissimilar ; and since, finally, the good, if it possesses a complex 
usefulness, does not usually possess this usefulness in the same 
degree at all times, — on all these grounds it is easy to see that 
the increment of utility which a good causes, or the marginal 
utility which it may afford, may vary very greatly from one 
employment to another. For instance, it may very well be 
that a pile of boards, used for building material, affords its 
owner a marginal utility that may be indicated by the figure 
8, while the same boards, used as fuel, would only afford a 
marginal utility indicated by the figure 4. The question now 
is : In such cases which is the true economical marginal utility 
that determines the value of the good ? 


The answer is easy enough . it is always the highest 
marginal utility. As has been already shown at length, 1 the 
true marginal utility of any good is identical with the least 
utility which it may be employed, economically, in providing. 
If, then, several mutually exclusive employments compete for 
any particular good, it is clear that, in any rational scheme of 
economy, the most important among them will get the prefer- 
ence ; it alone is economically permissible ; all less important 
uses are excluded ; and, as the good cannot be used in these 
employments, they can have no influence on the value set upon 
it. To put it in terms of our concrete example. If a peasant, 
after using his stock of wood to provide for all the more urgent 
wants of building and fuel, has still two uses for wood — two 
employments to which he could profitably put it — indicated by 
the numbers 8 and 4, but has only one pile of boards remain- 
ing, it is clear that he will apply them to the more important 
of the two uses, and leave the less important unprovided. 
So long as he can get a utility indicated by 8 in building, 
he will not burn the wood to get a utility indicated by 4. 
What depends, then, on his having or not having that particular 
pile of boards, is the obtaining or not obtaining of the greater 
utility 8. We may put the rule in general terms thus : in 
the case of goods which allow of alternative uses or employ- 
ments, and are capable of furnishing different marginal utilities 
in these uses, that employment which yields the highest marginal 
utility is the standard for the economical value of the goods. 
This rule will be found amply confirmed by experience. 
Nobody would price oak furniture at its value as fuel, or sell a 
fine picture for the price of old canvas, or estimate a lady's 
hunter by its capacity to draw a butcher's cart ! 

The formula, however, as now stated might easily give rise 
to mistakes, and it will be advisable to anticipate these before 
going further. It might seem as if what I have just said was 
contradictory of what was said a little ago. I now say that, 
among several alternative employments having different marginal 
utilities, the highest is the standard, while a few pages ago it 
was demonstrated that, if the immediate marginal utility of a 
good (say the utility of the last good of its own class) was 
greater than its mediate marginal utility (say the marginal 

1 See above, p. 147. 


utility of goods of another class employed as substitutes), the 
lower marginal utility was the standard. 1 The seeming con- 
tradiction is very simply explained. In the former case we 
were dealing with a distinction between several ways in which 
a stock of goods could be employed ; now we are dealing with 
a distinction between two or more employments for which the 
stock of goods is not sufficient, and, as I have already shown 2 
on a former occasion, the least of those uses to which a good 
is put always coincides exactly with the greatest of those uses 
which fail of provision if there is no such good. 

When, then, in the above formula I spoke of several alterna- 
tive employments and of alternative marginal utilities, it must 
be understood as a method of expression which, literally speaking, 
is not quite correct. For, naturally, of those competing employ- 
ments only one cart, economically, be the last ; only one, there- 
fore, can be the true " marginal employment " — that in which 
we find the marginal utility — while all the other employments 
are, economically, inhibited. They make the more demand on 
our attention, however, as being the first or most conspicuous 
representatives of an entire branch of employment. As soon 
as we think of this latter branch at all, these representatives 
force themselves, in the first place, on our consideration, and 
it is by choosing between them that we, as it were, give a casting 
vote for one among entire groups of employment, such as 
carving and burning of wood, hacking and knacking of horses, 
and so on — an actual psychological procedure which appears to 
me best and most concisely indicated by the above formula. 

Here, however, it must be emphasised that the precedence 
given in the course of our inquiry to those pseudo-marginal 
employments is only formal : in our economical decisions they 
enjoy no sort of material preference. Generally speaking, 
the fact that the employments to which a good may be put 
fall into several distinct branches has really not the slightest 
influence on our calculations of value. Just as we do not value 
goods according to kinds of wants, 3 so we do not distribute 
them according to branches of employment. Every concrete 
employment is only looked on as a possible employment 
according to the rank which it maintains in virtue of its 
importance among all competing employments of every branch. 
1 See above, p. 157. 2 See above, p. 154 in note 2. 3 See above, p. 142. 


And thus, in obedience to the principle of economic conduct, 
we always follow one and the same course ; we allocate our 
stock of goods among the concrete uses which are of most 
importance on our scale, and the last of these determines for 
us the marginal utility and the value of the good. 

Now in doing so it will often happen that only one single 
branch of employment is taken into consideration. This will 
of course be, quite regularly, the case where we have only a 
single individual commodity to dispose of. But it will also 
happen where a whole series of concrete employments of one 
kind outweighs that of another kind in importance, and where, 
at the same time, this series is long enough, or the available 
stock of goods is small enough, to leave no provision for em- 
ployments of less importance. If, for instance, in any branch 
of industry, there are a hundred opportunities of employing 
certain goods, and the importance of each opportunity is indi- 
cated by the figure 8, while the opportunities in another branch 
of employment are indicated only by the figure 6, and if our 
stock of goods consists of fifty individual commodities only, 
naturally all the fifty will be devoted exclusively to the first 
kind of employment, and their value will be fixed, according 
to the highest utility, at 8. But often it will happen that 
wants representing different branches of employment — say, for 
instance, timber wanted for building and for burning — demand 
satisfaction simultaneously ; in such eases it is the ratio that 
chances to exist between the opportunities and the goods that 
decides to what branch of want the "last" employment will 
belong ; that is to say, the employment which determines the 
value. Suppose that in one branch of employment there are 
four opportunities, indicated, according to importance, by the 
figures 10, 8, 6, 4; and that in another branch there are 
four opportunities, indicated by the figures 9, 7, 5, 3 ; and 
suppose that a man possesses in all five individual goods ; 
there is no doubt that the five goods will be allotted to the 
opportunities 10, 9, 8, 7, 6, and that the last figure (which, 
accidentally, belongs to the first branch of employment) is the 
real marginal utility and determines the value of the good, 
while the employment that comes next in the second branch, 
that indicated by the figure 5, must, according to our formula, 
become the " pseudo-marginal utility." 



We are now ready to consider a concrete application of what 
has just been said, and one that lies at the root of a very wide- 
spread phenomenon. Hitherto we have mostly had before us 
cases where a commodity, in virtue of some technical adapta- 
bility peculiar to it, becomes susceptible of being employed in 
various ways. Quite apart from any such special assumption, 
however, the existence of an organised system of exchange 
gives almost every good a second kind of employment — that 
of being bartered for other goods. It is customary to put this 
against, and in opposition to, all other kinds of employment, 
and to associate this opposition between "Use" and "Exchange" 
with a division of value into " Use Value " and " Exchange 

Understood in a certain sense, to which in this place 
we shall adhere, both of these — exchange value as well as 
use value — are kinds of subjective value. Use value is 
the importance which a good obtains for the welfare of a 
person, on the assumption that it is used immediately in 
furthering his wellbeing ; and, similarly, exchange value is the 
importance which a good obtains for the welfare of a person 
through its capacity to procure other goods by way of barter. 
The amount of use value is measured, according to rules 
already known to us, by the amount of the marginal utility 
which the good in question brings its owner when used by 
himself. The amount of (subjective) exchange value, on the 
other hand, obviously coincides with the amount of the use 
value of the goods got in exchange. When I employ a good 
by bartering it I procure for my welfare exactly what the 


goods I get in exchange procure for me in utility. The 
amount of the good's subjective exchange value, therefore, is 
to be measured by the marginal utility of the goods got in 
exchange for it. 

Now nothing is more common than that the use value and 
the exchange value of a good to its owner are of unequal 
amount. To a scholar, for instance, the use value of his books 
would, as a rule, be considerably greater than their exchange 
value, while to the bookseller the contrary is likely to be the 
case. The question now recurs, Which of the two values in 
such cases is the true one ? 1 

Here we have only to deal with a special case out of a 
group for which we have already laid down the general rule. 
Employment in personal use and employment in exchange are 
two different ways of employing one good. If the good 
affords a different marginal utility in each employment, it is 
the higher utility that gives the standard for its economical 
value. If, therefore, the use value and the exchange value of 
a good are different in amount, the higher of them is its true 
value. We recognise this principle in practical life. We 
always employ our goods in that which corresponds to the 
higher and the true value. The scholar keeps his books ; the 
bookseller sells his. Or, if the scholar gets into reduced cir- 
cumstances, he also sells his books ; but in this case, while the 
use value and also the objective exchange value of the books 
remain unaltered, their subjective exchange value to him has 
risen. That is to say, there are now more urgent wants of other 
classes clamouring in vain for satisfaction, and the possibility 
of satisfying these other wants through the sale of the books 
acquires for him an increased importance, and an importance 
that easily outweighs the use value of the books. 

The recognition that there is a subjective exchange value, 
and that this is something entirely distinct from what is usually 
called exchange value (that is, objective exchange value), is of 

1 It is easy to see that we can only speak of two values in the same loose way 
as we spoke above of several " alternative marginal employments," for, naturally, 
a good can never have anything but one value to a person. Value is the 
importance which a good has for the wellbeing of a man, and this importance 
cannot be at the same time great and small, higher or lower. But we do 
now and then use this rather inaccurate way of thinking and speaking, and, 
therefore, I have here, as on the former occasion, adapted my formula to it. 


fundamental importance in guiding us among the phenomena of 
value. It may be advisable, on that account, to devote a little 
more attention to the subject. The illustration of the scholar 
is enough to convince us that the subjective importance, based 
on the possibility of barter, may take a different direction from 
that taken by the objective power-in-exchange and price of 
goods. For, price remaining unaltered, the subjective exchange 
value of the goods may rise. But the two exchange values 
may even move simultaneously in opposite directions. Take 
the case of a poor student, whose last and sole possession — the 
only thing he can call his own — is a Jubilee sovereign. There 
is no doubt that this sovereign will have a high subjective 
importance for the satisfaction of his own wants ; and there 
is no doubt that this importance is an exchange, value, for 
sovereigns have no use value. Now suppose that our student 
falls heir unexpectedly to a fortune of ten thousand pounds, 
while, simultaneously, on account of the limited number 
issued, the sovereign goes up from 20s. to 40s. How is it 
now with the " exchange value " of the sovereign ? Here the 
difference between the two conceptions becomes manifest. The 
objective exchange value, the current value of the coin, has gone 
up from 20s. to 40s. ; but the importance which it has for the 
satisfaction of its owner's wants, the subjective exchange value 
of the sovereign, has, owing to the changed relations between 
the student's wants and his resources, unquestionably fallen. 
Yesterday our student would have lamented the loss of the 
sovereign as the loss of his last defence against extremest 
hunger and misery ; to-day, perhaps, he gives it away with a 
light heart to a friend who collects coins. In spite of its 
increased current value it has become a mere bagatelle to liim. 
This fundamental and real difference between the two con- 
ceptions of exchange value is the principal reason why we can- 
not accept the ordinary division of Use Value and Exchange 
Value as the ultimate division of the total phenomena of value. 
To do so would be to separate related things, and to mix up 
matters which are really so heterogeneous that it is scarcely 
possible to find a common definition for them. Obviously, 
subjective exchange value is much more nearly related to sub- 
jective use value than to objective exchange value. If we 
wish to find our way with certainty among those phenomena 


to which the name of " value " has been attached, it is ad- 
visable to do as we have done : place objective exchange value 
by itself on one side, and subjective value on the other side, 
and afterwards separate the latter into subjective use value 
and subjective exchange value. 1 

1 Notwithstanding the objections of Diehl (P. J. Proudhon. Seine Lehre unci 
scln Leben, vol. i., Jena, 1888, p. 109), who approves of the "traditional dis- 
tinction of Use Value and Exchange Value," I must hold by everything I have 
said above. 



It very often occurs that, in order to obtain an economic 
utility, several goods require to co-operate in such a way that, 
if one good falls out of its place, the utility cannot be obtained, 
or cannot be completely obtained. Goods whose uses thus 
supplement each other we may follow Menger in calling Com- 
plementary goods. Thus, for instance, paper, pen and ink, 
needle and thread, cart and horse, bow and arrow, right and 
left hand gloves, and so on, are complementary goods. This 
complementary character obtains generally, indeed almost uni- 
versally, among productive goods. 

It is easy to see that the intimate Co-relation of comple- 
mentary goods — the co-relation in which they afford this 
utility — will be reflected in the formation of their value. 
This leads to a number of peculiarities, all, however, occurring 
within the limits of the universal law of marginal utility. 
In stating these we must distinguish between the value which 
belongs to the complete group, and that which belongs to 
individual members of it. 

The total value of the complete group adapts itself, as a 
rule, to the amount of the marginal utility which it is capable 
of affording as a group. If, for instance, three goods, A, B, 
and C, form a complementary group, and if the smallest utility 
economically obtainable by the joint employment of these three 
goods amounts to a value of a hundred, the three goods A, B, 
and C taken together will be worth a hundred. 

The only exception to this rule occurs in those cases where, 
on the general principles with which we are now familiar, the 
value of a good is to be measured, not by the immediate 

chap. ix HOW DIVIDED OUT 171 

marginal utility of its own class, but by the marginal utility 
of other classes of goods drawn on to serve as substitutes. 
In the special case under consideration this will occur if every 
individual member of the complete group is replaceable by 
purchase, or production, or even by taking a substitute out of 
some other isolated employment, and if, at the same time, the 
total sum of the utility which the substituted goods would 
otherwise (in isolation) have had is less than the marginal 
utility they afford as combined. If the latter, for instance, 
amounts to 100, while the substitutionary value, the value of 
the three members individually, is only 20, 30, and 40 — that 
is in all 90, — the thing that depends on the group of three is 
not the obtaining of the combined utility of 100 — which is, 
in any case, assured by the substitutionary goods — but only 
the obtaining of the smaller utility, the- 90, which fails of its 
provision when the members are taken away and become 
substitutes in the group. Since, however, in such cases the 
complementary character has, properly speaking, no influence 
on the formation of value, and the value is simply determined 
according to the ordinary laws already familiar to us, we need 
not give any separate consideration to this. In what follows, 
then, I shall give particular attention only to the normal case, 
where the marginal utility attainable by goods in joint employ- 
ment is, at the same time, the true marginal utility. 

As was before remarked, this marginal utility, first of all, 
determines the united value of the whole group. But in the 
manner in which this total value is divided out among the 
single members of the group, considerable differences emerge, 
varying with the casuistical peculiarity of the case. 

First, if none of the members admits of any use other 
than the joint use, and if, at the same time, no one member 
which co-operates towards the joint utility can be replaced, 
then one single member has the full total value of the group, 
and the other members are entirely valueless. Suppose, for 
instance, I pay five shillings for a pair of gloves, five shillings 
is the total value of the pair. If I lose one of the gloves I 
lose the whole utility, and, with it, the whole value of the pair ; 
and the remaining glove has no value. Of course either of the 
two gloves equally admits of either valuation, and it is simply 
circumstances that decide which of them is to rank as all, 


and which as nothing — the glove needed to complete the pair, 
or the useless single glove. Cases of this kind are relatively 
scarce in practical life. 

Second, and more common, is the case where the indi- 
vidual members of the group can afford another, though a less 
utility, outside of their joint employment. Here the value 
of the single member does not lie between everything and 
nothing, but between the amount of the marginal utility which 
it is capable of affording in isolation as minimum, and the 
amount of the joint marginal utility, after deducting the isolated 
marginal utility of the other members, as maximum. Suppose, 
for instance, that three goods, A, B, and C, in co-operation afford 
a marginal utility of 100; that A by itself has a. marginal 
utility of 10, B by itself of 20, and C by itself of 30; the 
value of A is determined as follows. If a merchant owns this 
good by itself he can get from it only its isolated marginal 
utility of 10, and the value of the good, accordingly, is only 
10. But suppose he owns the ivhole group, and is asked to 
sell or give, away the good A out of that group, what he has 
to consider is that, with the good A he can get a marginal 
utility of 100 ; without it, only the smaller (isolated) utility 
of the goods B and C, that is 20 + 30 = 50; and that, ac- 
cordingly, on the having or losing of the good A depends a 
difference in value of 50. As complement of the group it is, 
therefore, worth 100 — (20 + 30) = 50; as an isolated good it 
is worth only 10. 1 Here the difference in value is not so 
extreme as in the first case, but still it is very considerable. 

Third, and more common still, is the case where some 
individual members of the group are not only employed for 
other purposes, but are, at the same time, replaceable by other 
goods of the same kind. For instance, building ground, bricks, 
beams, and labour are complementary goods in the building of 
a house. But if a few carts of bricks, intended for the build- 
ing, go astray in transit, or some of the labourers engaged for 

1 Of course in this case also the peculiarities of the case decide which member 
is to be valued as the completing member of the group, and which as simply 
the isolated piece. If, for instance, the owner of the complete group is asked 
to sell the good A, he will value it as completing member, and the other goods 
B and C as isolated pieces. But if he is asked to sell C, he will value it as 
completing member at 100- (10 + 20) = 70, while A and B will be valued as 
isolated pieces. 


the job refuse to work, in normal circumstances this does not 
in the least hinder the obtaining of the joint utility — the built 
house. The labourers and materials are simply replaced by 
others. The consequences as regards the formation of value 
are as follows : — 

1. The replaceable members, even if they are needed as 
complements, can never obtain any higher than their " substi- 
tution value " — viz. the value conferred by the utility in those 
branches of employment from which the replacing goods are 
obtained. 1 

2. This fact considerably contracts the limits within 
which the value of the individual good — estimated some- 
times as complementary, sometimes as isolated good — may be 
determined, particularly when it is a common marketable 
good. The more numerous the available goods of any kind, 
and the more numerous the opportunities of using them, the 
smaller will be the difference between the importance of that 
use from which a replacing sample might be drawn, as maxi- 
mum, and the use next to it in rank, in which a superfluous 
isolated good might be employed, as minimum of value. If, for 
instance, besides the good A, which we shall call A 1} contained 
in the complementary group, there are two other similar goods 
A 2 and A 3 , and if the possible opportunities of use (outside of 
employment in the complementary group) possess an import- 
ance indicated by the numbers 50, 20, 10, and so on, only 
the uses indicated by 50 and 20 would be filled by the goods 
A 2 and A 3 , and if one of these two were taken to replace the 
good A x a utility of 20 would be lost. On the other hand, if 
the complementary group were broken up, and the good A x 
itself obliged to seek for an isolated and inferior employment, 
its only chance would be the third, that indicated by 10. 
Thus its value would always lie between 10 (isolated) and 20 
(complementary). But if, instead of three, there are a thou- 
sand goods, and a thousand opportunities of using them, the 
difference between the 1000th employment (from which the 
good required to replace the other must in case of need be 

1 To put it concretely : although a load of bricks were absolutely indispen- 
sable to finish a house, the load could never obtain any higher value than that 
determined by the marginal utility of bricks generally ; that is, as determined 
by all the uses to which bricks generally are put. — W. S. 


drawn) and the 1001st (in which the good must look for 
employment if it becomes superfluous through the breaking 
up of the group) will certainly fall to a quite insignificant 

Now, of course, it is not likely that any one individual, 
within the limits of his own economy, will possess a thousand 
goods of one kind, and a thousand different opportunities of 
employing them. But, all the same, the efficiency of the 
influences just described is in no wise annulled ; it is only 
the scene of their operation that is changed, from individual 
economy to the market, and that in the following way. In- 
dividuals buy what they require, and sell their surpluses in 
the market. Here, then, all the stocks of goods and all the 
opportunities of employing them over the entire field covered 
by the market, come together. And now — exactly as before — 
everything depends on whether, in the market, commodities 
and opportunities of employing them are scarce or not. If 
the commodity is very scarce, it makes a very considerable 
difference in the determination of price whether we approach 
the particular good as buyer or as seller. For instance, 
suppose, as before, that there are only three similar goods, and 
three buyers each wishing to acquire just one such good, with 
the view of using it in employments that will yield 50, 20, 
and 10. Then, if one of these goods be withdrawn from the 
market to serve in a complementary employment, the two 
remaining goods are bought for the employments indicated by 
50 and 20, and — according to laws which will be explained in 
next book — the purchase price must be fixed between 10 and 
20, say at 15. But if now the complementary employment 
fails, and the third good also is thrown on the market, it must 
— if it is to find a sale at all — fall to the buyer who can get 
10 by employing it, and the result is that the market price is 
in all cases fixed below the level of 10. Here, then, the price 
— and the subjective exchange value based on it— varies not 

If, on the other hand, there are a thousand similar goods 
offered, and a thousand buyers demand them, evidently it will 
not make the smallest difference to the market price whether 
there appears a thousand and first buyer, or a thousand and 
first seller ; the good obtains a price and value independently 


of whether it finds a place in the single complementary 
employment or not. 

Thus, under the assumptions now laid down, the value of 
the replaceable members is fixed at a certain level independently 
of their concrete complementary employment, and this value 
they have when we distribute out the total value of the group 
among its individual members. The distribution, then, will 
be made thus : of the total value of the whole group — which 
is determined by the marginal utility of the joint employment 
— this fixed value is previously assigned to the replaceable 
members, and the remainder — which varies according to the 
amount of the marginal utility — is reckoned to the non- 
replaceable members as their individual value. To use our 
old illustration again ; say that the joint marginal utility 
amounts to 100, and that the members A and B have a fixed 
"substitution" value of 10 and 20 respectively, 70 must be 
reckoned the individual value of the non-replaceable good C ; 
or, say that the marginal utility of the group amounts to 120, 
the individual value of C will be 90. r 

Of the three cases we have discussed the last mentioned is 
by far the most common in practical life, and, accordingly, in 
the great majority of cases, the value of complementary goods 
is determined according to the latter formula. The most 
important application of it is in the distribution of the product 
among the various productive powers co-operating in producing 
it. Almost every product is the result of the co-operation of 
a group of complementary goods consisting of uses of ground, 
labour, fixed and floating capital. Of the complementary 
members the great majority are marketable commodities, and 
replaceable at will ; as, for instance, the labour of wage-earners, 
the raw materials, fuel, tools, etc. Only a few of them are non- 
replaceable, or not easily replaceable ; as, for instance, the 
land on which the peasant works, the mine, the railway lines, 
the factory walls, the activity of the undertaker himself with 
his peculiar and high qualifications, and so on. It is easy to 
see, therefore, that here we have exactly those casuistical cir- 
cumstances in which the foregoing formula of distribution 

1 If C also were replaceable by a substitute of less value the case mentioned 
on p. 170 would emerge, and the marginal utility of the joint use would not 
determine the value of the complementary group. 


obtains, and, as a fact, it is acted upon in practical life in the 
most accurate way. In actual business the " costs " are first 
deducted from the total return. If we look closer, however, 
we shall see that what is deducted is not all the costs — for, 
if so, the use of ground, or the undertaker's activity, as both 
valuable goods, would come under costs — but only the expendi- 
ture for the replaceable means of production with a given 
substitution value, viz. the wage of labour, raw materials, wear 
and tear of tools, etc. The remainder, under the name of 
" net return," is ascribed to the non-replaceable member or 
members : the peasant calculates it to his land, the mine- 
owner to his mine, the manufacturer to his factory, the 
merchant to his undertaking activity. 

If the joint returns increase, it would not occur to anybody 
to ascribe the surplus to the replaceable members ; it is 
always the ground or the mine that " produces more." And, 
similarly, if the joint returns decrease, nobody would credit 
the " costs " with the reduced amount ; the deficiency also is 
conceived as exclusively due to the diminished productiveness 
of the ground or the mine. And this is entirely logical and 
correct : on goods replaceable at any moment only the fixed 
substitution value is actually dependent ; the entire remainder 
of the joint amount of utility obtainable depends on the goods 
that cannot be replaced. 

The theory of the value of complementary goods is the key 
which will solve one of the most important and difficult 
problems of political economy — the problem of the distribution 
of goods as made in the present state of society, where 
competition is more or less free and prices are determined by 
free contract. All products come into existence through the co- 
operation of the three complementary " factors of production," 
labour, land, and capital. Now our theory, in showing how 
much of the joint product may economically x be considered as 

1 Not physically. It would, in most cases, be absolutely impossible to 
calculate the physical share — how could one be supposed to distinguish what 
percentage the material and what percentage the artist had contributed physi- 
cally to the making of a statue ? — but it is also a matter of no importance. On 
the other hand it is, in most cases, quite easy to determine what share of the 
utility, or of the value, would have to be done without if one were not in pos- 
session of a definite individual factor, and this quota, conditioned by the 
possession of one factor, I call its economical share in the total product. 


due to each of these, and what share of the total value may, 
accordingly, be assigned to each of them, lays down, at the 
same time, the most decisive basis for determining the amount 
of remuneration which each of the three factors obtains. And 
thus although, as we know, capital as " factor of production " 
does not exactly coincide with capital as " source of income," 
yet this gives us at least a rough indication of the way in 
which the amount of the three branches of income — wage, rent, 
and interest — is determined. 

It does not indeed do this quite directly. That quota 
which the workers receive, and that other quota which the 
owners of the co-operating ground receive, is directly identical 
with wage and rent. But the quota which falls to the 
co-operation of capital is not interest — as, in theories of dis- 
tribution, economists have repeatedly assumed ever since the 
days of Say with fatal precipitation. It is, first, the gross 
remuneration for the co-operation of capital ; and, out of 
this, interest is got, like a kernel out of a shell, because, and 
to the extent that, something remains over after deducting 
from the gross remuneration the value of the worn-out capital. 
To explain how this is so is a problem in itself. To make 
it quite clear by an illustration, suppose that a commodity, 
produced by the co-operation of all three factors, is worth 
£100. The law of complementary goods will carry us thus 
far ; it will enable us to determine that the share of labour 
(the labour directly employed in the production) amounts 
to, say, £20, that of ground to £10, that of capital to 
£70. But it does not tell us what, or how much, of that 
£70 remains over net, as interest, after deduction of the wear 
and tear of capital. On the contrary, the law of com- 
plementary goods in itself would rather lead us to the 
conclusion that nothing remains over. For, according to it, it 
would be most natural to assume that the capital, to the 
co-operation of which the return of £70 is ascribed, and which 
has been consumed in obtaining that return, had already been 
valued at the entire £70 ; and, if this were the case, the 
return to capital would naturally be entirely absorbed by the 
wear and tear of the capital. That this is not the case is, so 
to speak, an internal matter — a matter which plays its part 
inside the gross share of capital determined by the law of 



complementary goods, and is the object of an independent 
problem, the peculiar problem of Interest. But before we can 
discuss interest there is still a great deal to be explained. 1 

1 The confusion, so common in economic literature, between the gross share 
assigned to the co-operation of capital (Rohzins) and net interest, has been 
fully discussed in my Capital and Interest (see the criticism of Lauderdale, p. 146 ; 
of Carey, p. 155 ; of Strasburger, p. 175 ; of Say, p 189, etc.) It will not be 
expected of me- to give a complete theory of distribution in the passing, as 
it were. I purposely refrain from going deeper into the subject than is necessary 
for my special task, the development of the Interest theory. And for this it is 
sufficient to sketch only in the broadest lines the principles which limit the 
gross share of capital, as against the shares of labour and uses of land that 
co-operate with it : our special task will be to lay down what is the state of the 
case as regards the gross share of capital. Moreover I hope that on this question 
of the shares allotted to the various factors, which I am compelled to treat in a 
very cursory way, the eagerly expected work of Wieser will very shortly shed a 
clear light. (Wieser's Der Natilrliche Werth, Vienna, 1889, appeared while this 
was passing through the press. — W. S. ) 




It has been almost a commonplace of economical teaching that 
the value of goods is regulated by the costs of their production. 
This doctrine has very seldom been questioned on grounds of 
theory, 1 but very often its validity has been closely limited by 
the enumeration of exceptions, and insertion of all sorts of 
saving clauses. In this contracted sphere, however, it has held 
almost unquestioned authority down to our own times ; it has 
a certain amount of support in practical experience, and, what 
is most serious, it seems to contradict the theory of value just 
put forward. For " Costs of Production " are nothing else 
than the sum of productive goods which must be used up in 
the making of a good — the concrete capital consumed, the 
labour expended, and so on. Now to the question as to the 
ground and amount of value which a good has, our theory 
answers : it depends on the marginal utility which a good is 
capable of rendering ; that is to say, it depends on its future 
employment. But the other theory answers : it depends on 
the value of the productive goods consumed in producing it ; 
that is to say, on the conditions of its origin. Putting aside 
this contradiction for a moment, and forgetting everything we 
have been taught as to costs, let us inquire impartially what 

1 Among older writers it was disputed by Say, Traite, vol. ii. chap. ix. 
seventh edition, p. 404 : " Ce qui nous ramene a ce principe deja etabli, que les 
frais de production ne sont pas la cause du prix des choses, mais que cette cause 
est dans les besoins que les produits peuvent satisfaire." In more recent litera- 
ture what M'Leod has said (Elements of Political Economy, 1858, p. iii.) is worth 
notice. But the matter was really first grasped in its entirety by Menger, 
Jevons, and Walras, whose books mark an epoch as regards the whole value 
theory, and of these again the work of Menger was the most profound. 


our theory of marginal utility, logically carried out, has to say 
as to the value of productive goods, and as to " costs." 

For the sake of clearness it is desirable, before going 
further, to define with more exactness the object of our present 
inquiry, viz. Productive Goods. As compared with consump- 
tion goods (Genussgibter), which directly serve to satisfy human 
wants, all productive goods have this common feature — 
they serve to satisfy human wants only indirectly. But they 
differ, again, from one another in the degree of indirectness. 
The flour, for instance, from which bread is baked, stands 
nearer the final satisfaction of want by several degrees than 
the field which grows the wheat. To express these degrees — 
which we shall find to be of importance both theoretically and 
practically — we shall avail ourselves of Menger's division of 
goods into ranks. 1 In the first rank we shall place consump- 
tion goods — those goods which serve immediately for the satis- 
faction of wants ; such as bread. In the second rank we place 
those goods which assist in producing the goods of first rank — 
the goods which co-operate in the production of bread ; as the 
flour, the oven, and the baker's labour. In the third rank we 
place those goods which serve for the production of goods of 
second rank ; as the wheat from which the flour is ground, the 
mill in which it is ground, the building materials of the oven, 
etc. It? the fourth rank we put the means of production of 
goods of third rank ; as the land which grows the corn, the 
implements used in cultivation, the labour of the agricul- 
turist, the building materials of the mill, etc. And so on to 
the fifth, sixth, and seventh ranks, which embrace those goods, 
the useful service of which consists in producing goods of the 
rank immediately below them. 

On the lines of our conception of value it must be self- 
evident that a productive good, like any other good, can 
only obtain value for us through our recognition that on 
its possession or non-possession depends our gain or loss of 
some one utility, of some one satisfaction of want. And it 
is equally self-evident that its value will be high when the 
dependent satisfaction is important, and low when it is unim- 
portant. The only difference is that, in the case of goods for 
immediate consumption, the good and the satisfaction stand 

1 Grundsatze, p. 8. 


beside each other in a direct causal relation ; while, in the 
case of productive goods, there is interposed, between them and 
the satisfaction finally dependent on them, a more or less 
lengthy series of intermediate members, their successive pro- 
ducts. In this prolonged connection there is both matter and 
occasion for the development of new and legitimate relations, 
particularly between the value of means of production and 
that of their products. But the great law of value is neither 
destroyed nor disturbed by these relations. Exactly as in the 
analogous case of complementary goods it is only obscured, as it 
were, by a mass of details, to which the more ample development 
of the phenomena gives occasion. These details we have now 
to consider. To this end let us take a typical productive series. 

A good for immediate consumption, which we shall call A, 
is made from a group of productive goods of second rank, 
which we shall call G 2 ; this from a group of goods of third 
rank, G 3 ; and this, finally, from a group of fourth rank, G 4 . 
For simplicity's sake assume, first, that each of these productive 
groups passes without loss of time into the product which it 
creates, and that, at the same time, this particular employment 
is the only one of which it is capable. We have now to find 
out what is the relation of dependence between each member 
of the above series, and the wellbeing of its owner. 

What depends on the final member, the good A, we already 
know. It is its marginal utility. Our inquiry, then, begins 
at the member G 2 . If we had not the group G 2 we should 
not have its product A ; that is to say, of the class of goods to 
which A belongs, we should have one fewer than we should 
otherwise have had. But, as we already know, one good less 
means one satisfaction less, and that the least satisfaction to 
which, economically, one good of the stock would otherwise 
have been devoted. In other words, it means the loss of the 
marginal utility of the product A. On the group G 2 , therefore, 
exactly as on the final product A itself, depends the marginal 
utility of A. Looking now at the next member we find that, 
if we had not the group G 8 , we could not have the group G 2 
which is made from it ; and, as consequence, we should lose 
one good of the class A, or its marginal utility. On the group 
G 3 , then, depends exactly the same utility and importance for 
wellbeing as on the members which come after it in the pro- 



duction series. The same thing again follows, in the case of 
the group G 4 . If it fails us, we, of course, lose one of the 
group G 3 , which otherwise might have been produced from it ; 
we lose, further, one of the group G 2 , one of the class of good 
A, and, finally, the marginal utility of A. Thus we arrive at 
the following general proposition : On all groups of Means of 
Production of remoter rank which successively pass into one 
another, there depends one and the same gain to human well- 
being ; that is, the marginal utility of their final product. No 
one will be surprised at this result. It is a foregone conclu- 
sion that a series of productions, which has no relation to our 
wellbeing except through its final member, can neither tend 
towards any other utility, nor condition any other utility, than 
that which this final member itself conditions. In every 
member of the chain successively we hold in our hand the 
condition of this final utility, sometimes at a further, sometimes 
at a nearer stage on the way to it. 

■** From what has been said we may deduce the following 
general principles as regards the value of means of production. 
First, since on one and the same utility depend all the groups 
of means of production which successively pass into one 
another, the value of all these groups must be substantially 
the same. Second, the amount of this, their common value, 
is regulated for all, in the last resort, by the amount of the 
marginal utility of their finished product. I emphasise " in 
the last resort." For, thirdly, the value of each group has its 
immediate measure in the value of its product, the succeeding 
group. In the first instance, the utility and service of the 
means of production consist and exhaust themselves in the 
making of their product, and, naturally, the more important 
and more valuable the product is for us when made, the higher 
will be the estimate put on the importance of this utility, and 
of that which provides it. Substantially the third proposition 
is fully covered by the second, for, in the value of the goods 
of higher rank, the marginal utility of the final product is 
mirrored. From this marginal utility value is conducted to 
all the groups of means of production, but the conduction is 
done, as it were, by stages. First, and immediately, the 
amount of the marginal utility stamps itself on the value of 
the final product. This then forms the measure of the value of 


the group of goods from which this product comes. This again 
measures the value of the third group ; and the third group, 
finally, the value of the last group, the goods of fourth rank. 
From stage to stage the name of the determining element 
changes, but, under the different names, it is always the same 
thing that acts — the marginal utility of the final product. 

Although the second and third propositions, then, agree in 
substance, it is necessary to formulate the third explicitly. It 
is important as being a convenient abbreviated formula which 
we use in practical life much more frequently than the prin- 
cipal formula. If we are estimating what amount of wellbeing 
a productive instrument brings us, we look, naturally, first of 
all to the product which we get from it, and then, beyond 
that, to the wellbeing which that product brings us. If we do 
not know this, we must, I admit, go over the entire course of 
the conduction of utility, member by member, till we come 
finally to the marginal utility of the final member, the finished 
product. But very often this is not necessary. From previous 
consideration, or from experience, we meet with some opinion, 
already formed, on the value of the products, and, without 
further consideration, we make this the ground of our opinion 
as to the value of the means which produced them. A wood 
merchant, buying timber for cask staves, will not take long to 
consider the value of the wood to him. He estimates how 
many staves he can get out of the timber, and he knows what 
the staves are worth in the condition of the market at the 
time. Further than this he need not trouble himself. 

Thus far we have formulated these principles as to the 
value of means of production on purely theoretical grounds ; 
to some extent, as postulates of economical logic. If, now, we 
ask what experience says to these postulates, we shall find 
that it confirms them. Indeed we can appeal for confirmation 
to that very " law of costs " which is apparently so hostile to 
our theory of marginal utility. Experience shows that the 
value of most goods is equal to their " costs." But "' costs " 
are nothing else than the complex of those productive goods 
which have value — the labour, concrete capital, uses of wealth, 
and so on, which must be expended in the making of a product. 
The well-known identity of costs and value is only another 
form of expressing the identity of value between groups of goods 


of various ranks which pass into one another. I anr quite 
aware, of course, that, as regards the cause of this identity, 
those who adopt the law of costs usually read it in the con- 
verse way. While we say that the value of means of pro- 
duction, and therefore the value of the costs, is regulated by 
the value of their products, the usual way of interpreting the 
law is to say that the value of products is determined by the 
value of their costs — that is, by the value of the means of 
production out of which they are made. Later on we shall 
have occasion to go thoroughly into this difference of opinion 
as to the cause of the identity. Meantime all I intend to do 
is simply to confirm the statement, that the asserted identity 
of value between groups of productive instruments which 
successively pass into one another — whatever be its cause, — 
is an actual empirical fact. 

Of course this identity is not absolute, but approximate ; 
we can only speak of a tendency towards identity of value. 
The divergences from absolute identity are of two kinds — 
partly irregular, partly normal. Both kinds arise from the 
fact that production costs time. In the long periods which 
often intervene while goods of sixth or eighth rank are passing 
gradually through all the transformation stages into the finished 
consumption good, both men and things may change. Wants 
may change ; the relations between wants and their provision 
may change ; and, not less important, the knowledge of these 
relations may change. With them, of course, changes the 
valuation of the goods at various stages on their way to the 
matured product. It is easy to understand that the fluctua- 
tions which proceed from this cause may be sometimes great, 
sometimes small, sometimes upwards, sometimes downwards ; 
they are irregular fluctuations. But, besides these, we notice 
a divergence from complete identity which is constant and 
normal. It is a matter of observation that the total value of 
a complete group of remote rank lags somewhat behind the 
value of its product, and in a definite ratio ; and that, indeed, 
the amount of this difference in value is graduated according 
to the time required to change the group of means of produc- 
tion into its product. If the value of the product, for instance, 
is £100, experience tells us that the total value of the labour, 
uses of land, fixed and floating capital spent in producing it, is 


something less than £100 — perhaps £95 if the production 
process lasts a year; perhaps £97 or £98 if it lasts only half 
that time. This difference of value is the crease, as it were, 
in which Interest is caught. Its explanation is a subject by 
itself, with which we shall have enough to do in following 
chapters. It would be very far from advisable to mix it up with 
our present inquiry, where we are dealing with the general 
relation between the value of means of production and that of 
their products, and for the moment we shall therefore entirely 
disregard the existence of this particular difference of value. 

Up to this point we have expounded the law which 
governs the value of productive goods under the simple 
hypothesis that each group of productive instruments permits 
of only one quite definite employment. But in actual life the 
cases in which this hypothesis corresponds with facts are very 
limited. It is, indeed, characteristic of productive goods that 
they admit of an infinitely more various use than consumption 
goods. The vast majority of them are adapted to several 
productive uses, while many of them, like iron, coal, and, 
above all, human labour, are adapted to thousands of different 
uses. In theoretical research we must, of course, take note of 
these actual circumstances, and see whether they do not involve 
some modification of our law, that the value of a group of goods 
of remote rank is determined by the value of its product. 

Suppose, then, we vary the assumptions of our typical 
illustration. A man possesses a great stock of groups of pro- 
ductive instruments of second rank (G 2 ). From one such 
group he can, at will, make a finished commodity of the kind 
A, or one of the kind B, or one of the kind C. Naturally he 
will provide for his various wants harmoniously, and will 
therefore, by means of different parts of this stock, produce 
simultaneously finished goods of all three classes according to 
the measure of his requirements. In a scheme of provision 
that was really harmonious, the amounts produced would be 
so regulated that, in each kind, wants of something like the 
same importance would depend on the last sample of the kind, 
and the marginal utility of every sample would therefore be 
approximately equal. 1 Nevertheless there will be differences, 

1 This is demanded by the principle of " economic conduct." See Wieser, 
Ursprung und Hauptgesetze des wirthschaftlichen Wertlws, p. 148. 


and even considerable differences, of marginal utility, because, 
as we already know, 1 the gradation of the concrete wants in 
any kind of want is not always uniform and unbroken. One 
fireplace in a room, for instance, will give me a very consider- 
able utility — which I may represent by the figure 200 — while 
a second fireplace would not be of any further use to me. 
Naturally, in providing for my wants, I shall therefore, in any 
case, stop at fireplaces when I have one fireplace with its 
marginal utility of 200, even if in other branches of wants 
the provision goes down, on the average, as low as a marginal 
utility of 100 or 120. To make our typical illustration true 
to nature, therefore, we must assume that the marginal utility 
of one sample is of different amount in the three kinds A, B, and 
C — say 100 in A, 120 in B, 200 in C. The question now 
is, In these circumstances what is the value of G 2 ■ 

After the practice we have had in drawing distinctions of 
a similar kind, we can give the answer without hesitation — the 
value will "be equal to 100. For if one of the available groups 
were lost the owner would naturally shift the loss to the least 
sensitive part ; he would neither limit the production of the 
kind B, where he would lose a marginal utility of 120, nor of 
the kind C, where he would lose a marginal utility of 200. 
He would simply produce one less of the kind A, whereby his 
loss of wellbeing would be only 100. To put it generally: 
The value of the productive unit adjusts itself to the marginal 
utility and value of that product which possesses the least 
! marginal utility among all the products for whose production 
the unit might;, economically, have been employed. All the 
relations which we found to hold as regards the value of 
means of production and of their products under the simple 
hypothesis of the single employment, hold, therefore, generally 
between the value of means of production and their least 
valuable product. 

And how does it stand with the value of the remaining 
classes of products, B and C ? This question brings us to the 
source of the " law of costs." 

If, under all circumstances, the marginal utility attainable 
within the kind itself were to decide, the kinds of goods B and 
C would possess a value diverging, as well from the value of 

1 See above, p. 145. 


the kind A, as from the value of its costs G 2 . B would have 
a value of 120, C a value of 200. But this is one of those 
cases where, through substitution, a loss occurring in one kind 
of goods is shifted to another kind, and consequently the 
marginal utility of the latter becomes the standard for the 
former. 1 That is to say, if one of the kind C gets lost there 
is no occasion to give up the marginal utility of 200, which it 
would have directly afforded ; we can and will immediately 
procure a new C out of a productive unit G 2 , and we shall 
prefer to produce one less of that kind of good in which the 
marginal utility, and with it the loss of utility, is least. This, 
in our illustration, is the kind A. In virtue of the opportunity 
of substitution offered by production a good of the kind C is 
therefore valued, not at its own marginal utility 200, but at 
100, the marginal utility of the least valuable cognate product 
A The same holds, of course, of the value of kind B, and 
would hold, generally speaking, of every kind of good which is 
" cognate in production " 2 with A, and has at the same time 
an immediate marginal utility greater than that of the kind A. 
This leads to several important consequences. First of all, 
in this way the value of goods which have a higher individual 
marginal utility is put on a level with the value of the 
" marginal product " — as we shall call that product which has 
the least marginal utility — and thus with the value of the 
means of production, from which both in common come ; the 
theoretical identity of Value and Costs, therefore, holds in this 
case also. But it is well worthy of notice that here the 
agreement between value and costs is brought about in a way 
essentially different from the agreement between costs and 
marginal product. In the latter case the identity was brought 
about by the value of means of production adapting itself 
to the value of the product ; the value of the product was the 
determining, that of the means of production the determined. 
In the present case, on the contrary, it is the value of the 
product that must adapt itself. In the last resort, of course, 
it adapts itself only to the value of another product, the 
marginal product of the cognate production ; but, in the first 
instance, it accommodates itself also to the value of the means 
of production from which it comes, and which are mediated 
1 See above, p. 156. 2 Wieser, p. 146. 



by the substitutionary connection with the marginal product. 
Here the conduction of value describes, as it were, a broken 
line. First it goes from the marginal product to the means 
of production and fixes their value ; then it goes in the opposite 
direction, from the means of production to the other products 
which may be made from them. In the end, therefore, products 
of higher immediate marginal utility get their value from the 
side of their means of production. To translate this from the 
abstract formula into practice. If we are considering what a 
good B or C (generally speaking, a product of higher immediate 
marginal utility) is worth for us, we must say first of all : It 
is worth exactly as much as the means of production from 
which we could replace it at any moment. Then if we examine 
further how much the means of production themselves are 
worth, we come to the marginal utility of the marginal product 
A. But very often, indeed, we may save ourselves this further 
inquiry, as we already know the value of the goods that make 
up the cost without having to begin at the foundation and 
follow it from case to case ; and in all such cases we measure 
the value of the products in an abbreviated form, both accurate 
and convenient — that is to say, simply by their costs. 

Here, then, we have the whole truth about the celebrated 
Law of Costs. As a fact people are right when they say that 
costs regulate value. Only they must always be conscious of 
the limits within which this " law " holds, and the source from 
which it gets its strength. It is, first, only a particular law. It 
holds only in so far as it is possible to obtain, at will and at 
the right time, substitutes through production. If there is no 
opportunity of substitution the value of every product has to 
be measured by the immediate marginal utility of its own 
kind, and its agreement with the value of the marginal pro- 
duct, and with the intermediate means of production, is dis- 
turbed. Hence the well-known empirical proposition that the 
law of costs holds only as regards goods " reproducible at will," 
or " freely produced," and that it is simply an approximate 
law which does not bind the value of the goods that come 
under it with slavish exactitude to the level of costs, but — 
according as production for the moment comes short of demand 
or runs beyond it — permits of fluctuations now on one side, 
now on the other. 


But it is still more important to emphasise, in the second 
place, that, even where the law of costs holds, costs are not 
the final but only the intermediate cause of value. In the 
last resort they do not give it to their products, but receive it 
from them. In the case of productive goods which have only 
a single employment this is perfectly clear. That Tokay is 
not valuable because there are Tokay vineyards, but that the 
Tokay vineyards are valuable because Tokay has a liigh value, 
no one will be inclined to deny, any more than that the value 
of a quicksilver mine depends on the value of quicksilver, the 
wheat field on the value of wheat, the brick kiln on that of 
bricks, and not the other way about. It is only this many- 
sided character of most cost goods — their capacity of being 
employed in many different uses — that gives the appearance 
of the contrary, and a little consideration shows this to be an 
appearance and nothing more. As the moon reflects the sun's 
rays on to the earth, so the many-sided costs reflect the value, 
which they receive from their marginal product, on to their 
other products. The principle of value is never in them, but 
outside them, in the marginal utility of the products. The 
law of costs is not an independent law of value ; it only forms 
an incidental case inside the true universal law of marginal 
utility. It is simply the great counterpart to the law of Com- 
plementary Goods. As the latter disentangles and explains 
those relations of value which result from the temporary and 
causal collocation — the simultaneous co-operation of several goods 
to a common useful end ; so does the Law of Costs for the 
value relations of those goods which act in temporary and 
causal sequence — the working of goods after one another and 
through one another to the same final goal. If we think of 
the value relations of goods that work into one another as a 
much -tangled net, we might say that the former law dis- 
entangles the meshes in their length and breadth, while the 
latter disentangles them in their depth; but both fall under 
the all-embracing law of Marginal Utility, and are nothing but 
special applications of that law to special problems. 



. u 



Exchanges are not made simply for amusement. People who 
take the — not always trifling — trouble to exchange the goods 
which they possess for other goods, do so for a rational and 
material end, and, in nine hundred and ninety-nine cases out 
of a thousand, this end is to better their economical condition 
by the exchange. 1 Whether this end be attained, and in what 
degree it be attained, depends naturally on the current condi- 
tions of exchange, particularly on the prices which the parties 
get as equivalent for their goods. It is, therefore, a perfectly 
natural thing that the motive which gives rise to exchange in 
general, namely, the striving after economical advantage, should 
maintain a commanding influence in the fixing of the exchange 

In what follows I mean to inquire how prices are deter- 
mined under the assumption that all who take part in the 
exchange act exclusively from the motive of pursuing their 
immediate economical advantage in it. The law which we 
shall arrive at in this way I have already, 2 for very good 
reasons, called the fundamental law of the formation of price. 
I am perfectly aware that, in practical life, this law does not 
exactly obtain. Eor, although the motive of self-advantage is 
almost never absent, and is almost always the most prominent 
motive, still, in price transactions, other motives do very often 
get mixed up ; such motives as humanity, custom, friendship, 

1 Menger, Gfrundsalze, p. 153. Of course now and then exchanges may be made 
simply to show some person a kindness ; perhaps to conceal a present, or a charity 
in the guise of an exchange. But such cases form only a quite insignificant 
minority. 2 Grundziigc, part ii., in Conrad's Jahrbiicher, vol. xiii. p. 4&ti. 


vanity, or the influence of outside institutions, such as govern- 
ment taxation, union regulations, boards for fixing wages, and 
the like, give them another direction than that they would 
have taken if exclusively dominated by self-advantage. Such 
motives, indeed, scarcely ever get the upper hand of the other 
to the extent of making us conclude an exchange which would 
cause us positive economic loss ; but they often make us decide 
to be content with a less amount of advantage than we should 
have got in steadily pursuing our interests. 

I have on the same occasion l expressed myself with all 
clearness on the theoretical and practical importance of the 
admixture of these other influences, and I shall only now briefly 
sum up what I then said. In actual life this admixture of 
motives causes certain modifications of the fundamental law of 
the formation of price, and the statement of these modifications 
cannot be neglected in any accurate and complete theory of it. 
But if all that is wanted is to grasp the characteristic features 
of the formation of price, it is enough to put forward the 
" fundamental law " above mentioned. For just as, among the 
motives . that determine price, that of striving after self- 
advantage in exchange has the lion's share, so does the lion's 
share in the theoretic explanation of the phenomena of price 
fall to the " fundamental law " here stated. And it is suf- 
ficient for us in our present task, as we have not to pursue 
the theory of price as an end in itself, but only so far as is 
necessary to establish the theoretical connection between the 
elementary phenomena of subjective value and the complicated 
phenomena of interest. In this law we obtain a principle 
which is not minutely accurate, but is amply sufficient for the 
further development of the theory of capital. 

Before going on to state the peculiar laws of price, it may 
be desirable to preface them by some considerations that may, 
more accurately, unfold the content of the fundamental motive 
which forms the assumption and basis of the whole of the 
following inquiry. 

In exchange transactions the decisions made always turn 
on two points; these are — (1) whether, in a given state of 
things a man should exchange or not ; and (2) if he decide to 

1 Grundzuge, p. 480. 


exchange, what form he should try to give to the terms of the 
exchange. Now in making these decisions it is obvious that 
the man who looks to his own immediate advantage and nothing 
else, will act according to the following rules. First, he will 
exchange only if the exchange brings him an advantage. 
Second, he will rather exchange for a greater advantage than 
for a less. Third, he will rather exchange for a small advantage 
than not exchange at all. 

It scarcely need be shown that these three rules are dictated 
by our fundamental motive, and constitute the practical sub- 
stance of it ; what does require elucidation is an expression 
that recurs in them all, " to exchange with advantage." 

The meaning of the expression obviously is — to exchange 
in such a way that the exchanger gains more in wellbeing from 
the goods he gets than he loses in the goods he gives ; or, since 
the importance that goods have for life and wellbeing is ex- 
pressed in their subjective value, to exchange in such a way 
that the goods received possess a greater subjective value than 
the goods parted with. If A owns a horse and is willing to 
exchange it for ten casks of wine, it can only be because the 
ten casks of wine have a greater value for him than his horse 
has. But, naturally, the other party to the contract thinks 
exactly in the same way. He, on his part, will not give up 
the ten casks of wine if he does not get for them a good that 
has a greater value for him. He will exchange his ten casks 
for A's horse only if the wine is worth less to him than the 
horse is. 

From this we get an important rule. An exchange is 
economically possible only between persons who put a different 
value, even an opposite value, upon the commodity and upon 
the price equivalent. 1 The buyer must put a higher, the seller 
a lower, estimate on the commodity than he does on the 
equivalent. Indeed the interest which the two parties have 
in the exchange, and the gain they get from it, increases as the 
difference between their estimates increases ; if the difference 

1 It will be observed that our author does not confine the word Price to Money 
price, but applies it to the equivalent good or goods obtained in exchange for 
what is, pre-eminently, the good — the object of demand from buyers, and of supply 
from sellers. The convenient word Preisgut I render by "price equivalent," or 
simply "equivalent." — W. S. 


decreases their gain decreases ; and if the difference disappears, 
and their estimates coincide, no exchange is, economically, 
possible between them. 1 

It is easy to see that, under the regime of the division of 
labour, there must be innumerable chances of opposing estimates, 
and therefore innumerable opportunities of exchange. That is 
to say, as each producer makes only one or two kinds of articles, 
and these far in excess of his own personal requirements, 
he has at once a superfluity of his own products and an absence 
of all others. He will, therefore, ascribe to his own product 
a low subjective value, and to other products a relatively high 
subjective value. But, conversely, the other producers will 
ascribe a high value to all products which they have not, and 
a low value to their own products of which they have too 
many, and here we have in the fullest degree that relation of 
opposite valuations which is mr^st favourable to the effecting 
of exchange. 

Another idea that comes out in what has been said we 
may follow to its logical consequences. To one consulting his 
own advantage an exchange, as we saw, is economically possible 
only when he estimates the good to be acquired more highly 
than the good possessed. Now, obviously, this will more readily 
occur the less value he puts on his own commodity, and the 
more value he puts on the equivalent. A man who values his 
horse, subjectively, at £50, and values a cask of wine at £10, 
has, economically, a much greater possibility of exchange — or, as 
we shall say in future for brevity's sake, is much more " capable 
of exchange" — than another who values his horse at £100 and 
a cask of wine at £5. The former, obviously; can proceed with 
the exchange if six casks are offered him for his horse., while 
the latter must hoLd back unless something over twenty casks is 
offered him. If a third party again values his horse at £40 
only, and a cask of wine at £15, obviously he would be 
economically capable of concluding an exchange if even three 

1 Say, e.g., that A values his horse at five casks of wine, while B values it at 
fifteen, then, if the horse goes for ten casks, each gains an amount of value repre- 
sented hy five casks of wine. If A values the horse at eight and B values it at 
twelve, each gains only a value of two casks. Finally, ii both agree in valuing 
the horse at twelve casks of wine, B, of course, would be glad to get the horse for 
ten casks, or for any price under twelve casks, but A, naturally, would not give it 
him at that price. See Menger, Grundsatzc der Volksmrthschaftslehre, p. 155. 


casks were offered him Generally speaking, then, that ex- 
changer is the " most capable " who puts the least value on his 
own commodity in comparison with that offered him in exchange, 
or, what is the same thing, puts the highest value on the other 
commodity in comparison with the commodity which he offers 
in exchange for it. 

Now that we are sufficiently acquainted with the meaning 
and content of our " fundamental motive," we may proceed with 
our proper work, and consider what are the normal effects 
which this fundamental motive exerts on the formation of 
price. In this part of our work the method already pursued 
by several distinguished economists seems to me by far the 
most convenient : first, by typical illustrations to show how, 
under certain definite assumptions, price is and must be 
determined, and then to separate the accidental surroundings 
of the illustration from what is universal and typical, and 
formulate the latter into laws. I shall begin with the simplest 
typical case, the determination of price in isolated exchange 
between a single pair of exchangers. 



A peasant, whom we shall call A, requires a horse. His 
individual circumstances are such that he attaches the same 
value to the possession of the horse as he does to the possession 
of £30. A neighbour, whom we shall call B, has a horse for 
sale. If B's circumstances also are such that he considers the 
possession of the horse worth as much as, or worth more than 
£30, there can, as we saw, be no exchange between- them. 
Suppose, however, that B values his horse at considerably less, 
say at £10. What will happen ? 

First, it is certain that there will be an exchange ; in the 
assumed circumstances each of the contracting parties can 
make a considerable profit by the exchange. If, for instance, 
the horse changes hands at £20, A, who considers it worth £30, 
makes a profit of £10, and B, who gets £20 for an article 
worth only £10 to him, gets the same amount of profit. 
They will, therefore, in any case, according to the proposition 
" rather a small gain than no exchange," agree on making 
an exchange at a price advantageous to both of them. The 
question now is : How high will this price go ? As to this it 
may be said definitely : The price must at all events be less 
than £30, otherwise A would have no economical advantage, 
and would have no motive for going on with the exchange. 
And it must at all events be higher than £10, or there would 
be no use in the exchange to B, and perhaps even loss. But 
the particular point between £10 and £30 at which the price 
will be fixed cannot be determined beforehand with certainty. 
Any price between the two is, economically, possible ; a price 
of £10 : Is. or a price of £29 : 19s Here, then, is room for 


any amount of " higgling." According as in the conduct of the 
transaction the buyer or the seller shows the greater dexterity, 
cunning, obstinacy, power of persuasion, or such-like, will the 
price be forced either to its lower or to its upper limit. If 
both parties have equal skill in bargaining, the price will be 
fixed approximately midway ; that is to say, about £20. 

There is no difficulty in putting this briefly in the form of 
a general proposition. In isolated exchange — exchange between 
one buyer and one seller — the price is determined somewhere 
between the subjective valuation of the commodity by the 
buyer as upper limit, and the subjective valuation by the seller 
as lower limit. 



First : of one-sided competition of Buyers. Accommodating 
the conditions of our illustration to the requirements of the new 
typical case, let us assume that A 2 finds a competitor, whom 
we shall call A 2 , already in the field, and that he also has the 
intention of purchasing the horse. The circumstances of this 
competitor are such that he counts the possession of the horse 
worth as much as £20. What will happen now ? Each of 
the competitors wishes to buy the horse, but only one, of 
course* can buy him. Each of them wishes to be that one. 
Each, therefore, will try to persuade B to sell the horse to him, 
and the means of persuasion will be to bid a higher price. 
Thus ensues the familiar phenomenon of mutual overbidding. 
How long will this last ? It will last till the rising bids have 
reached the valuation of the least capable competitor, who, in 
this case, is A 2 . So long as the bids are under £20, A 2 , act- 
ing on the motto " father a small gain than no exchange," will 
try to secure the purchase by raising his offer, which attempt, 
naturally, A ls acting on the same principle, will counteract by 
raising his offer. But A 2 cannot go beyond the limit of £20 
without losing by the exchange. At this point his advantage 
dictates " better no exchange than a loss," and he leaves the 
field to his competitor. 

This is not to say that the price A x pays must be just £20. 
It is possible that B, knowing A 2 to be in urgent want of a 
horse, will not be content with £20, and will try, by holding 
back and by skilful bargaining, to extort a price of £25, £28, 
err even £29 : 19s. The one thing certain is that the price 
cannot exceed £30 (the valuation of A a who concludes the 


purchase) and cannot be under £20 (the valuation of A 2 , the 
excluded competitor). 

Assume now that, in addition to A x and A^, three other 
buyers, A 3 , A 4 , A 5 , compete for the horse, and that their cir- 
cumstances are such that they count the possession of the 
horse equivalent to £22, £25, and £28 respectively. It is 
easy to show, in the same way, that, in the ensuing com- 
petition, A 3 will bid to the limit of £22, A 4 to £25, and A 5 to 
£28 ; that the most capable competitor, A x , will always be the 
successful one; and that the price will be fixed between £30 
as higher limit, and £2 8 — the valuation of the most capable of 
the excluded competitors — as lower limit. 

The results of this investigation may therefore be expressed 
in the following general proposition : — 

In one-sided competition of buyers — where there is one 
seller and more than one buyer — the most capable competitor 
will be the purchaser ; that is, the one who puts the highest 
value on the commodity he wishes to buy in comparison with 
the good he wishes to sell ; and the price will lie somewhere 
between the valuation of the purchaser as higher limit, and 
the valuation of the most capable among the unsuccessful com- 
petitors as lower limit — always understood that the price can 
in no case be lower than the subsidiary lower limit of the 
seller's own valuation. Comparing this proposition with the 
result arrived at under the former typical case, we see that 
competition of buyers has the effect of narrowing the sphere 
within which price is determined, and narrowing it in the 
upward direction. Between A and B the limits within which 
price was determined were £10 and £30 ; by the added com- 
petition the lower limit was moved up to £28. 

Second : of one-sided competition of Sellers. This forms 
the exact converse of the foregoing. Entirely analogous ten- 
dencies lead to entirely analogous results — only in an opposite 
direction. The statement of this need not detain us long. 

Suppose that our friend A is the only buyer, and that five 
dealers, whom we shall call B x , B 2 , B 3 , B 4 , and B 5 , are compet- 
ing to sell him a horse. We assume that all the horses are 
equally good, but B x values his horse at £10, B 2 values his at 
£12, Bj, at £15, B 4 at £20, and B 5 at £25. Each of the five 


rivals tries to utilise the present as the sole opportunity of sale, 
and endeavours to secure a preference over his competitors by- 
underselling, as in the former case by overbidding. But as 
no one will care to offer his commodity for less than what it 
is worth to himself, B 5 will cease offering at £25, B 4 at £20, 
B 3 at £15; then B x and B 2 will compete for a while till, 
finally, at £12 B 2 finds himself "economically excluded," 1 and 
B x alone keeps the field. The price at which he remains a 
seller must necessarily be higher than £10 — otherwise there 
would be no use in the exchange, and therefore no motive for 
it — but neither must it be higher than £12, otherwise B 2 will 
continue his competition. 

In general terms, then, we have the following proposition. 
In one-sided competition of sellers — where there is one buyer 
and more than one seller — the most capable competitor will be 
the actual seller ; that is, the one who puts the lowest value 
on the good he wishes to sell in comparison with the com- 
modity he wishes to buy ; and the price will lie somewhere 
between the valuation of the seller as lower limit, and the valu- 
ation of the most capable among the unsuccessful competitors 
as higher limit. 2 Compared, therefore, with the case of isolated 
exchange, where, according to the first formula, the price had 
to lie between £10 and £30, the sphere within which price is 
determined will be narrowed by the competitions of sellers, 
aud narrowed in the downward direction. 

1 Menger, p, 183. 

2 Always without prejudice to the second or subsidiary upper limit formed by 
the valuation of the buyer, which the price can in no case go beyond. Where 
there is anything like full competition of sellers, however, this is seldom of 
practical importance. 



The case of two-sided competition is the most common in 
economic life, as it is the most important in the development 
of the Law of Price. It demands, therefore, our most careful 

The typical situation which the present case assumes may be 
represented by the following scheme. It shows us ten buyers 
and eight sellers, each of them wishing to buy or sell a horse, 
and it tells us at the same time the degree of the subjective 
valuation put upon the horse by each of the exchangers. It 
will be seen that the figures which represent these valuations are 
very different, and this exactly corresponds with facts. Indeed, 
the individual relations of want and provision for want, which 
regulate subjective value, are so very various that it would be 
difficult to find two persons who had an entirely similar 
opinion about the value of any one thing. 


A x values a horse at 
(and will buy at any pr 



l io 


B l 

values a 




ice under) 


will sell at any prict 



B 2 





B 3 





B 4 





B 5 





B 6 



£21 :10s. 


B 7 





B 8 







To complete the scheme, it must be added that all the 
competitors appear simultaneously in the one market ; that all 


the horses offered for sale are of equal quality ; and, finally, that 
the buyers and sellers make no mistake about the actual state 
of the market, such as would prevent them from really pur- 
suing their own egoistic interests. 1 We ask now, What will 
happen in this situation ? 

The circumstances of A x are such that he considers a 
horse to be worth £30 to him ; it would therefore be to his 
advantage to buy even at £29 ; and it is quite certain that any 
of the eight sellers would be glad to sell him a horse at a 
price so advantageous to them. But, evidently, A l would be 
a very poor business man if he rashly bought at such a high 
price. For his self-interest demands from the exchange not 
merely a profit, but the greatest possible profit. Instead, 
then, of buying at the highest price — which, all the same, he 
might do in the worst possible case — he will prefer to begin 
by offering a price as low as his least capable rivals, and will 
only raise his offer when, and in the degree that, it is neces- 
sary to save himself from being shut out of the market. 

In the same way B x , who, economically, could quite well 
sell at a price of £11, and at that price could very easily find 
buyers, will carefully hold back from offering his horse at the 
lowest figure which he would accept, and will not reduce his 
price below what he must take if he is to keep his place in the 
competition. It may be assumed, then, that the transaction 
will begin with the buyers holding back and offering low 
prices, and with the sellers holding back and asking high 
prices. 2 

1 If, e.g., a buyer erroneously imagines the number of horses brought to 
market to be much less than it really is, it may very well happen that he hastily 
consents to pay a higher price than he would have found necessary if he had 
given better attention to his own interests. The influence of errors like this on 
the formation of price must not, of course, be overlooked in a theory of price, but 
where we are merely trying to bring out the simplest fundamental law it is not 
necessary to go into such details. See Grundzuge, as before, part ii. p. 486. 

2 The more experienced both parties are, and the more familiar with the con- 
dition of the market, the shorter will be the time spent in "trying the market" 
by preliminary offers. In an old and well-organised market competitors will 
save themselves the trouble of making offers that are not meant to be taken, 
and will make their first offers at least somewhere near that zone within which 
the market price will finally be fixed. The extreme limit of this curtailment is 
given in the " fixed prices " of sellers. In this case, trying the market is entirely 
dispensed with, and sellers undertake at one throw, as it were, to hit the very 
zone into which the condition of the market will force the price. They must try 


Suppose the buyers begin with an offer of £13. It is at 
once clear that — putting aside the case of gross error as to 
the condition of the market — the buying cannot be concluded 
at this price. For at £13 all the ten buyers would be willing 
to buy, since all of them put a greater value on the horse than 
£13 ; but, at that price, only two horses, those of Bj and B 2 , 
could (economically) be offered for sale. Now evidently B,^ and. 
B 2 would be very poor sellers if they did not make use of the 
active competition of buyers to raise their price, and the others 
would be as poor buyers if they let the best chances of pur- 
chasing be snatched away by two of their members without 
attempting to obtain the preference by bidding a price some- 
what higher, but still advantageous to themselves. Exactly, 
then, as in the case discussed in last chapter, the surplus buyers 
will be weeded out by means of mutual overbidding. How 
long will this weeding process go on ? 

At any price under £15 all ten buyers can compete. 
From that point the least capable competitors must, one after 
another, withdraw from the competition. At £15 A 10 is 
knocked out, at £17 A 9 , at £18 A 8 , at £20 A 7 . But as the 
bids rise on the one side, the number of those sellers who, eco- 
nomically, become capable of selling increases on the other side. 
At any price above £15 B 3 may seriously think about selling, 
above £17 B 4 , and above £20 B 5 Thus the marked dispro- 
portion, which existed at first between the horses demanded 
and the horses actually offered for sale, is gradually reduced. 
At £13 there was an effective demand for ten horses, and only 
two could, economically be offered ; while, at any price over 
£20, only six horses are demanded and five offered, the majority 
of buyers over sellers being thus reduced to one. So long, 
however, as the rival buyers are in the majority, and this fact 
is accurately known in the market, there can be no final settle- 
ment. For, on the one hand, the sellers have always the 
chance, and the temptation, to take advantage of the excess of 
buyers and stand out for higher prices ; and, on the other hand, 

to hit this zone quite exactly ; for if they put the price lower they lose their 
profit, while if they put it higher the buyers in the market get supplied by 
other competitors, and the sellers are left with their commodities. Fixed prices, 
however, are less common in the open market than in shops, where selling is 
never conducted under the full pressure of competition, and where, consequently, 
any mistake in the price asked is not so hazardous. 


the mutually opposed interests of the rival buyers compel them 
to bid still higher against each other. Obviously, A$ would 
scarcely consult his own interests if he were calmly to look on 
while his five rivals went off with the five cheapest horses, and 
left him no chance of an exchange, and, therefore, no chance of 
a profit. 1 But, at the same time, no one of these rivals would 
allow A 6 to purchase one of the five horses most '* strongly " 
offered for sale. For, if so, the man who withdrew in favour 
of A 6 might indeed purchase a horse, but only under less 
favourable conditions — the conditions, that is, offered by the 
most conservative sellers B 6 , B 7 , and B 8 , and at a price which, 
at least, exceeds the subjective valuation of £21 : 10s. that 
B 6 puts on his horse. Thus if the buyers know their own 
interests, the whole body of them will feel impelled to continue 
their bidding against each above the level of £20. A 

Finally, the situation becomes essentially different when 
the rising bids have reached the limit of £21. At that price 
A3 is compelled to cease bidding, and there are now only 
five sellers against five buyers. These buyers can all be satis- 
fied simultaneously, and there is no occasion for further com- 
petition among themselves : on the contrary, as against the 
sellers, their common interest is to close at the lowest possible 
price. The bidding of buyers against each other, which 
hitherto has prevented the final settlement, now comes to an 
end, and the bargains may be concluded at the price of £21. 
But they need not be concluded at that price. The sellers 
may possibly be stiff and refuse £21, in hope of a still higher 
offer. What will happen in this case ? First of all, the 
buyers, rather than have a fruitless errand and go away without 
making any exchange, will bid higher. But their limit is now 
very near at hand. If the sellers stand out for a price above 
£22, A 5 must give up all idea of purchase, and there will be 
five sellers against four buyers. One of the sellers, then, will 
have to fall out, and as no one would care to be that seller 
there will — from motives quite analogous to those which before 
prompted the surplus buyers to overbid each other — ensue a 

1 If the horses of B x to B 5 are sold, the most capable seller remaining is B 6 , 
who values his horse at £21 : 10s. — that is, higher than A 8 . As we know, then, 
an exchange between A 6 and B 6 is economically impossible, and the same is true 
a fortiori of the. less capable sellers By and B a . 


mutual underselling among the surplus sellers, till such time 
as the fifth seller meets a buyer : this will be the case some- 
where under the limit of £22. x 

Indeed, in the present case, the limit must go still lower. 
So long as a price over £21 : 10s. was possible, there would be 
a sixth possible seller in the person of B 6 ; this would give the 
sellers a majority of one over the five buyers, and compel them 
to offer under each other, if they are not to be shut out from 
the exchange. In this competition the weakest must first go to 
the wall, and this fate will overtake B 6 the moment that his 
rivals are content to take a price below the level of £21 : 10s. 
— at which figure the number of competitors on either side 
will be equalised, and the level of price found at which the 
competition may cease. Thus assuming, as we do in this 
illustration, that each competitor knows what is the condition 
of the market, and intelligently follows his own interests, the 
limits within which the price must necessarily be determined 
are narrowed to £21 and £21 :10s. ; those being the only 
limits within which there occurs the relation favourable to the 
final settlement — that all who are able to take a share in the 
business find it their advantage to do so, while all who do not 
find it their advantage, the unsuccessful competitors, have no 
power to prevent the others from coming to terms. 2 

Let us try now to apply the results of these lengthy 
analyses to our theory of price. s^ 

We notice, first, that what decides success in two-sided 
competition is, as in the case of one-sided competition, 
the degree of "capability" for exchange On either side 

1 It need scarcely be said that the gradual bidding Up of buyers, and the 
gradual under-offering of sellers, do not usually take place in two separate and 
succeeding stages, but generally occur simultaneously. 

2 In the nature of things the result shown in our abstract scheme will be the 
more exactly realised in practice, the better known the total condition of the 
market is to all interested ; that is to say, the more organic the market, and the 
more publicly the negotiations are conducted. Where, on the other hand, as is 
usually the case, transactions are conducted in groups that are, indeed, in com- 
munication, but are yet somewhat separated from each other either in space or 
time, the relations of competition that would prevail over an entire market will, 
naturally, not be quite active in the single groups, and this has for result that the 
prices formed in the single groups are frequently only more or less approximate 
to the ideal market price represented in our scheme, without necessarily exactly 
coinciding with it. 


it is the most capable competitors who come to terms, 
namely, those buyers who put the highest value on the 
commodity (A a to A 5 ), and those sellers who put the lowest 
value (B : to B 5 ), while all less capable competitors are ex- 
cluded. And, indeed, if we look more closely, we shall find 
that the series of successful competitors includes all competing 
pairs, arranged by capability, between whom there exists the 
relation necessary for exchange, viz. that the buyer considers 
the commodity worth more than the seller does. In our 
illustration A 5 considers B 5 's horse worth more than B 5 
himself does, and, accordingly, they can exchange with each. 
other. 1 A 6 , on the other hand, values the horse of B 6 at 
£21 only, while B values it at £21 : 10s., and therefore they 
cannot come to terms — and still less can those competitors who 
are less capable. 

Very closely related to the grounds on which are decided 
the successful competitors in the struggle of competition are, 
secondly, the grounds on which is decided the market price 
that results from this struggle. This price — to recur to our 
illustration — cannot, in any case, be higher than the valuation 
of A 5 , nor less than that of B 5 ; otherwise the fifth buyer in 
the one case and the fifth seller in the other would not have 
come to terms. But, again, the price cannot in any case be 
higher than the valuation of B 6 , nor less than that of A 6 ; 
otherwise in the former case a sixth buyer would begin com- 
peting with the other five buyers, and in the latter case a 
sixth seller competing with the other five sellers ; the equi- 
librium would thus be destroyed, and the overbidding and 
under-offering would inevitably be continued till such time as 
the price was forced within the limits already indicated. 

To put these results in general form: — In two-sided com- 
petition the market price is determined within a latitude of 
which the upper limit is constituted by the valuation of the last 
buyer who actually exchanges (the last buyer) and that of the 
most capable seller excluded (the first excluded seller), and the 
lower limit by the valuation of the least capable seller who actu- 
ally effects a sale (the last seller) and that of the most capable 
buyer excluded (the first excluded buyer). The meaning of this 

1 Or with one of the more capable competitors, but in no case with a weaker 
one. See more exactly on this point in my Gnindzuge, p. 499. 


double limitation is that, in every case, it is the narrower limit 
that decides. 1 If, finally, we substitute the short and signi- 
ficant name of " Marginal Pairs " for the detailed description of 
the four parties whose competition determines the price, we get 
this very simple formula : The market price is li mited and deter - 
m ined bv tlm'snniective valuations of the two Marg inal ^gire 

This suggests a number of reflections. 

The first thing that strikes us is the analogy between the 
formation of price and the formation of subjective value. We 
saw that the subjective value of any good, unaffected by the 
more important uses to which single members of the same 
stock might be put, was a " marginal value " — a value deter- 
mined by the good's marginal utility, or that utility which 
stands on the very limit of the economically permissible. Now 
we see that every market price is a " marginal price " — a price 
determined by the economical relations of those competing 
pairs which, also, stand on the very limit of exchangeability. 
It is easy to see that the analogy here is no chance coincidence, 
but one that results from closely-related and internal causes. 
In the case of subjective valuation, the motive of economical 
advantage demanded that the available stock of goods should 
be employed in satisfying the wants that stood highest on 
<each man's scale, the last of the wants thus supplied indicating 
the " marginal utility." In the case of the formation of price, 
the motive of the competitors' economical advantage demands 
that the pairs which are most capable on the scale of competi- 
tors should come to terms, and one of these again is the last, 
the " marginal pair." In the former case, the provision for all 
satisfactions more important than the marginal utility was 
assured without the particular good whose value was the 
subject of discussion, and the only utility dependent on this 
latter good was the last, the marginal utility. In the latter 
case, all the contracting pairs more capable than the marginal 
pairs may come to terms at prices higher or lower, and here 
again it is only the fate of the last, the marginal pair, that 

1 In our illustration it is the valuation of the excluded parties A 6 and B„. If, 
however, the valuation of A 6 , instead of being £21, had been £19, and that of 
B 6 , instead of £21 :10s., had been £23, Ihe limits would have been determined 
by the Valuation of the last pair who actually came to terms : the price would 
have been fixed between £20 and £22. 



depends on the price just reaching a definite height, neither 
greater nor less. And, finally, as in the former case the 
importance of the last dependent want, in virtue of its 
dependent relation, gave the good its value, so, in the latter 
case, the economical circumstances of the last dependent pair — 
here also in virtue of their dependent relation — confer on the 
commodity its price. 

But this analogy does not exhaust the connections between 
price and subjective value. Of still greater consequence is the 
fact that price, from beginning to end, is the product of sub- 
jective valuations. Look back over what we have said. It is 
the relation of the subjective valuation of commodity and price- 
equivalent which decides the persons who may consider it worth 
their while to compete, either as buyers or sellers ; that is to 
say, decides which parties are " capable of exchange." It is the 
same relation which decides on the degree of each competitor's 
capability of exchange. With perfect exactness it decides for 
each man the figure at which his advantage calls him to join 
in the competition, and it decides, at the same time, the limit 
at which he is beaten and obliged to withdraw from it. As 
further result, it decides the parties who, among the most capable 
competitors, actually come to terms ; it decides to which pair 
falls the role of being marginal pair ; and, finally, it decides on 
the price at which the bargains are concluded in the market. 
Thus, as a fact, in the whole course of the formation of price 
— so far as it is conducted on purely egoistic principles — there 
is not a single phase nor feature which is not traceable, wholly 
and entirely, to the position of subjective valuations as its 
cause. And this is at bottom perfectly natural. For, as we 
know, these subjective valuations point out whether any 
importance, great or little, attaches to a good as regards our 
economic wellbeing, and how great the importance is ; and, 
consequently, these valuations, wherever we acquire or part 
with goods solely with regard to our economic wellbeing, mark 
out the natural, indeed the only possible compass of our trans- 
actions. We are, therefore, fully justified in defining price as 
the resultant of subjective valuations put upon commodity 
and price-equivalent within a market. 1 

1 Sax, who, in his theory of value and price, stands wholly and entirely on 
the foundation laid hy Menger, repeatedly and with emphasis characterises market 


Of course it is a resultant of a peculiar kind. The amount 
of price is not the resultant of the sum, or of the average of all 
the valuations that come to the surface : in the formation of 
price these take very different shares. One class of them has 
no effect on price at all ; viz. those valuations made by all 
the unsuccessful competitors except the most capable pair. 
It is all the same whether there are no such valuations, or 
whether there are scores of them in the market : they make 
not the slightest difference on the resultant price. In our 
illustration, whether there are unsuccessful buyers A 7 to A 10 
or not, whether the category of the unsuccessful is composed 
of them alone, or of a hundred others besides, — so long as 
they cannot bid more than £20, it is easy to show that the 
resultant price will always run between £21 and £21 : 10s. 
The • excluded competitors may increase the congestion of the 
market, but they are not factors in that condition of the market 
which determines the formation of price. 1 

A second group plays a very peculiar part in this resultant, 
viz. that consisting of the valuations of all the contracting 
parties who actually come to terms, exclusive of the last. 
What they do is simply to bind and neutralise each other. 
Eecur again to our typical illustration. If we inquire what, 
for instance, the presence of A 1 contributes to the formation of 
price, we find that he takes up one member of the opposing 
series, namely, B x , with the result that now the formation of 
price proceeds exactly as if neither A x nor B t were in the 
market. Similarly it is not difficult to see that the efficiency of 
A 2 , A 3 , and A 4 simply consists in cancelling the efficiency of 
Bo, B 3 , and B 4 : if they are in the competition the resultant 

price as an "average of individual values" {Thcorctische Grundleguny der Staats- 
wirthschuft, p. 276 and passim). This expression, if given without commentary, 
is exceedingly unfortunate, indeed directly misleading. As may be seen from 
what follows above (and more exactly from what 1 wrote in my Grundzilge, 
pp. 505 and, particularly, 522), the characteristic thing, on the contrary, as 
regards the resultant price, is that it is not an " average " in the usual sense of 
the word. 

1 At least under the assumption distinctly made in our inquiry, that the com- 
petitors who appear in the market have a correct knowledge of the condition of 
the market. If we depart from this assumption, the appearance of more than a 
hundred demanders might give rise to the erroneous opinion that there may be 
among them a great many persons of higher ' ' capability," and this might mislead 
the few capable competitors who are present into rashly making higher offers. 




price falls between £21 and £21 : 10s.; if they were all absent 
A- and B 5 would still make their exchange at a price between 
£21 and £21 : 10s. And it is worth emphasising that the 
degree of the subjective valuations made in this group is quite 
indifferent to the result. A l5 for instance, whose valuation, in 
our scheme, is put down at £30, would cancel B : not less 
thoroughly if his valuation amounted to only £25 or £22 ; and, 
conversely, suppose that his estimate were £200 or £2000, of 
this enormous amount absolutely nothing would affect the result- 
ant price except the sum, in any case, absorbed in neutralising B x . 

If, however, the valuations of this group have no direct 
influence on the formation of price, it cannot be said that they 
are quite without effect. When the valuations of A t to A 4 
cancel those of B 2 to B 4 they have a twofold result. First, 
they prevent any stronger seller than B 5 getting into the 
marginal pair which immediately determines the price. And 
second, they prevent the strongest sellers from cancelling the 
next strongest buyers — as they might do if not cancelled 
already — and they thus prevent any weaker member of the 
buying series than A 5 from getting into the marginal pair. 1 
The part played by all those exchanging pairs who are stronger 
or more capable than the last may therefore be accurately 
characterised in the following words : Their valuations con- 
tribute nothing directly to the formation of the resultant price, 
but they do indirectly, in so far as they neutralise each other, 
and thus reserve the role of marginal pair for another couple. 

Finally, the real decision of price lies exclusively with a 

1 To show this, suppose we leave Ai to A4 out of our illustration. The position 
of the parties, then, is as follows : — 

A 5 . . 

. £22 

Bi . 

. £10 

A 6 . . 

. £21 

P.., . 

. £11 

-A - • ■ 

. £20 

B, . . . 

. £15 

A 8 . . 

T£18 ' 

B 4 . . . 

. £17 

A9 . 

. £17 

B 5 . . 

. £20 


. £15 

B 6 . . 

.£21 :10s 

B 7 . . . 

. £25 

! \vp sep that 

tho laet nnir roitV 

B 8 . . . 

in whirh thp erni 

. £26 

nnmicnl <»nnHitinns 

exchange are present consists of As and B 4 . The buyers, therefore, are now 
represented in the decisive marginal pair by a weaker member, the sellers by a 
stronger one. Accordingly the limit of price, which in the last case stood between 
£21 and £21 : 10s., moves down to between £17 and £18. 


third group, and that a small one — the valuations of the two 
marginal pairs. All weaker competitors being, absolutely, with- 
out influence, and all stronger ones cancelling each other, they 
and they alone are the directly effective components, and the 
market price is their resultant. 

At first sight it may appear strange that so few persons, 
and those so little conspicuous, should decide the fate of the 
whole market, but on closer examination this will be found 
quite natural. If all are to exchange at one market price, the 
price must be such as to suit all exchanging parties ; and since, 
naturally, the price which suits the least capable contracting 
party suits, in a higher degree, all the more capable, it follows, 
quite naturally, that the relations of the last pair whom the 
price must suit, or, as the case may be, the first pair whom it 
cannot suit, afford the standard for the height of price. 1 

1 Students of economic literature will not fail to notice an interesting relation 
in wliich the above theory stands to certain doctrines that have for long obtained 
full recognition. "When Thiinen — and with him the whole body of economic 
doctrine — said that the rate of interest was determined by the productivity 
of the "portion of capital last applied," and the rate of wage by the return 
of the "last worker employed in the undertaking" ; or when, much earlier, the 
question as to which, among several costs, regulates market price was decided in 
favour of the " highest costs of production that were still necessary to provide for 
the market," i.e. in favour of the "last seller," — we recognise in all these, with- 
out difficulty, adaptations to special cases of the same principle on which we have 
built the doctrine of marginal utility and the theory of the formation of price. 
The only thing is that at that time economists were not yet conscious of the 
universal importance of these peculiar lines of thought. They meant simply to 
state a couple of special rules of limited range, while in reality they had hit upon 
the dominating Leitmotiv, which underlies the entire mechanism of industry 
carried on under the guidance of self interest, and which, therefore, runs through 
the entire formation of value and price. 



The zone within the limits of which the struggle of competi- 
tion forces the formation of price is, as we have seen, character- 
ised as lying between the subjective valuations of the marginal 
pairs, and on this characteristic feature we have formulated 
our law of price. But this zone has a second characteristic 
feature : it is that in which exactly as many commodities are 
offered for sale as are wanted to purchase j 1 or, to use the 
common expressions, in which supply and demand are quan- 
titatively in equilibrium. In our scheme, at a price which did 
not rise to £21 more horses were demanded than were offered ; 
at a price which rose above £21 : 10s. more horses were offered 
than were demanded ; while in the zone indicated by our law 
of marginal pairs — that between £21 and £21 : 10s. — the 
position requisite to end the competition was reached, and at 
that price exactly as many horses were asked as were offered. 

Now, if it should be thought preferable, the formulation of 
the law of price may be based on this second characteristic 
feature, and it will then take the following shape : The market 
price is found in that zone in which supply and demand 
quantitatively balance each other. This formula is as correct 
as the other. It indicates the same zone in another way. 
But it is less expressive (1) in so far as it only points to 
the level of the determining zone in a roundabout way, 

1 I need scarcely say in so many words that it is not the number of persons 
wishing to buy and sell on which the formation of price depends, but the mass of 
commodities desired and offered, and that in the typical scheme it is only for 
simplicity's sake that I have assumed each person to desire and offer for sale 
only one commodity, whereby number of persons and mass of commodities go 
pari passu. 


while, by our formula, the limits of this zone are directly and 
positively indicated ; (2) as it has to contend to some extent 
with the difficulty of having to use the expressions Supply and 
Demand, — for the protean ambiguity of these terms is sure to 
bring innumerable errors and misconceptions in their train, just 
as it has brought the terms themselves into thoroughly bad 
repute with many. 1 Still, these drawbacks may very well be 
overcome by critical attention ; and there is no objection, in 
my opinion, to treat the theory of price under the good old 
catchwords Supply and Demand, if care is only taken to avoid 
the errors and misunderstandings which so plentifully surround 
them, and to inform the old forms and formulas with new and 
clear knowledge. 2 

In one special case this second formulation of our law of 
price is even the more exact of the two. In the vast majority 
of cases, the zone within which supply and demand just balance 
each other exactly coincides with the zone whose limits are 
marked out by the valuations of the marginal pairs. But there 
is one quite definite coincidence of circumstances in which it may 
happen that the equilibrium between supply and demand does 
not make its appearance within the whole of the last-mentioned 
zone, but only within a distinctly narrower part of that zone ; 
and, in such cases, the price is always fixed within these narrower 
limits. The very peculiar coincidence of circumstances which 
produces this result occurs very rarely indeed in economic life, 
but, among the cases where it does occur, there is one that is 
very important for the theoretical explanation of interest, and 
for that reason, in spite of its somewhat " exotic " character, I 
must devote a few words to it. 

The casuistical conditions of this case are the following. 
First, there must be considerable latitude between the valua- 
tions of the marginal pairs. This condition is most thoroughly 
fulfilled where all the competing exchangers come to terms 
(there being, therefore, no excluded competitors), and when, at 
the same time, the buyers, as a body, value the commodity 

1 See my Grundziige, p. 525. 

2 On the relation of the above theory of price to the old doctrine of Supply 
and Demand, as well as on the truth and error contained in that doctrine, I have 
already written at length in my Crrundziige, pp. 524-534 ; here it is sufficient to 
refer to that work. 


considerably higher than the selleis do. If there are, for 
instance, ten buyers who each value the commodity at £10, 
and ten sellers who each value it, subjectively, at £1, obviously 
all the ten pairs can come to terms, and the zone which Lies 
between the valuations of the last buyer and the last seller 
represents the wide latitude between £1 and £10. Secondly, 
that this latitude should be narrowed down, the further circum- 
stance must be present, that the desire of the buyers is directed 
to an unlimited number of goods, while, at the same time, the 
total amount of means of purchase must be strictly limited, 
and the buyers must be determined to spend the whole of this 
sum in purchase of the commodities in question — in the pur- 
chase of fewer goods if the price be high, in the purchase of a 
proportionately larger number of goods if the price be low. To 
put it in terms of our illustration. Say that each of the ten 
buyers is resolved to spend the sum of £100 in buying cotton 
goods; that is to say, at any price under £10 he will buy as 
many pieces as he can obtain for £100. And suppose that 
against this total competing demand of £1000 there is a supply 
of 200 goods, which their owners are inclined to let go at any 
price above £1. It is easy to see that the price must be fixed 
at £5 the piece. For if the price were to be less, say £4, the 
200 pieces offered would be purchased for £800, and £200 of 
the available means of purchase would remain unemployed. 
Here the owners, acting on the motto "rather a small gain than 
no exchange," will continue bidding up against each other, and 
so raise the price to £5, at which figure the whole capital of 
£1000 finds employment If, on the other hand, the price 
were to be put still higher, say £8, only 125 pieces of cotton 
goods could be bought with the £1000 available, and 75 would 
remain unsold. Now, obviously, no seller (considering that the 
price remains profitable to him till it is brought down as low 
as £1) would willingly forego taking part in the exchange, and 
thus the sellers, in fear of being shut out, would offer below 
each other, and the price would be pressed down to the equi- 
librium point of £5. Inside the wider zone, then, of £1 to 
£10 — that determined by the valuations of the marginal pairs 
— the necessity for equilibrium between supply and demand 
determines the price with much more exactitude, and fixes it 
at £5, that being the point at which, if the competitors follow 


their own interests without let or hindrance, the market price 
must be fixed. 

As we have already said, the extremely peculiar coincidence 
of circumstances necessary to this result occurs very seldom, 
but, as it happens, the cases where it does occur are very not- 
able. One of these is the formation of the price of Money — 
which, however, does not concern us here. 1 A second is the 
formation of price in the Labour market, and this is the case 
which we shall have to take up later on, on account of its close 
connection with the origin and height of Interest. It should, 
however, be carefully noted that, even in these two cases, the 
conditions under which this special form of the law of price 
appears are seldom met with in economic life in entire isola- 
tion. Thus the -practical importance of such cases is still 
further diminished, and, if the recognition of them cannot well 
be ignored in the course of any theoretical exposition, still, as 
regards the infinite majority of cases, the first formulation of 
the law of price — that which determines the height of price by 
the subjective valuations of the marginal pairs — may be relied 
on with perfect confidence. This formulation is always correct, 
and, for the infinite majority of cases, is sufficiently exact. 
Moreover, without losing its practical usefulness in the majority 
of cases, it permits of being still further simplified. Before 
going on to this., however, some other explanations are 

1 Without being a blind adherent of the "Quantity theory," I believe that, 
along with other important circumstances, the quantity of money, the amount of 
the supply of money, exerts a powerful influence on its purchasing power. But 
the supply of money has exactly the peculiarity described in the text, that, rather 
than let money lie entirely unused, holders will be content with a comparatively 
unremunerative employment, and that, at the same time, the entire given 
quantity of money strives to realise itself in the purchase of an unlimited quantity 
of commodities — the more the better. 




In the chapter before last we saw that price is determined at 
a level fixed by the valuations of the marginal pairs. We have 
still to ask, What are the circumstances which determine 
whether this level itself is high or low ? 

The first few steps in the answer are very easy. It is 
clear at a glance that the two things which must have the 
decisive influence on the position of the marginal pairs are the 
number and the intensity of the desires or valuations on both 
sides. In this way. The level of the valuation of the marginal 
pairs will tend to be high when, on the side of the buyers, 
there are very high valuations, and, relatively, a great many of 
them, and when, on the side of the sellers, the low valuations 
are relatively few. For, in this case, the few low valuations of 
the sellers will be cancelled by a portion of the more numerous 
high valuations of the buyers, and since, after this is done, there 
are still buyers with a high valuation, while at the same time the 
only remaining sellers also have a high valuation, the marginal 
pairs on both sides are composed of persons with high valua- 
tions. On quite analogous grounds the level of the valuation of 
the marginal pairs will tend to be low when, on the side of the 
buyers, there are (relatively) few high valuations, and on the 
side of the sellers there are (relatively) many low valuations. 

If we single out the individual factors from the combined 
action of which, as we have shown, the valuation level of the 
marginal pairs results, we get the following individual deter- 
minants of price : * — 

1 I should like to say that I here bring fonverd the theory of the determinants 
of price only in the briefest of epitomes, because the details of it have no imnie- 

chap, vi FACTORS OF DEMAND 219 

1. The number of desires directed towards the commodity 

(Extent of Demand). 

2. The figures which the buyers put upon their valuations 

(Intensity of Demand). 

The latter, however, is not a simple matter. The figures 
in which valuations are expressed are in no wise simple 
expressions of the absolute amount of subjective value which 
the commodity has for the valuer. They only express a 
relation obtained by comparing two different valuations — that 
of the commodity and that of the equivalent price. When we 
said in our scheme that A values a horse at £30, that is not 
to say or prove anything of the absolute importance of a horse 
to A's wellbeing ; all that it expresses is the relation in which 
the value of the horse to A stands to the value of the money 
to A. It simply says that A values the horse thirty times 
more highly than he values one pound sterling. If, therefore, we 
wish — and this is the task in which we are at present engaged 
— to lay down the elementary factors in the formation of price, 
we must put down, instead of the combined amounts which 
make up the figures of our valuation, the elements out of which 
they are combined. These elements are two — first, the 
absolute amount of subjective value which the commodity has 
for the valuer ; and second, the absolute amount of the sub- 
jective value which the unit of the equivalent price has for 
the valuer. And, indeed, they obviously work towards com- 
bination in this sense, that the figures are high in direct ratio 
to the absolute value of the commodity, and in inverse ratio to 
that of the equivalent, and vice versd. 

Thus, in our scheme of the determinants of price, instead 
of the valuation figures, we have to lay down as the deter- 
minants of these figures — 

(a) The subjective valuation of the commodity by the 

buyers (which itself, again, according to the law of 
marginal utility already laid down, depends on the 
relation of wants and provision for want) ; and 

(b) The subjective valuation of the equivalent price by the 

buyers. Since, under present conditions, it is money 

diate interest for the theory of capital. Any one interested in the theory of 
price as such, I would refer to the full statement in Conrad's Jahrbiicher, vol. xiii. 
pp. 508-524. 


that mostly serves as equivalent, and since, as we 
saw in a former chapter, the unit of money has a 
smaller subjective, value for the rich than for the 
poor, it is, in the last instance, the standard of comfort 
of the buyers which has the preponderating influence 
on the formation of this determinant. 1 
Continuing our enumeration we have — 

3. The number in which goods are offered for sale (Extent 

of Supply). 

4. The figures which the sellers put upon their valuations 

(Intensity of Supply). 
As in the former case, this latter determinant may be split 
up into two simpler factors — 

(a) The subjective valuations of the commodity by the 


(b) The subjective valuations of the equivalent price by 

the sellers. 
These two find their own further determination according to 
the law of marginal utility. But frequently this leads to a very 
noteworthy peculiarity. In the present condition of industry 
most sales are made by men who are producers and merchants 
by profession, and who hold an amount of their commodities 
entirely beyond any needs of their own. Consequently, for 
them the subjective use- value 2 of their own wares is, for the 
most part, very nearly nil ; and the figure which they put on 
their valuation (in which the subjective use -value is the 
standard element) also sinks almost to zero. Finally comes 
the result that, in such sales, the limiting effect which, accord- 
ing to our theoretical formula, would be exerted by the valua- 
tion of the last seller, practically does not come into play, and 
price is actually limited and determined by the valuations of 
the buyers alone. In other words : when goods are once 
produced, and the owner can do nothing with them for his 
own personal wants, they must, all the same, seek a market. 
To find this market the seller must, in the usual way, put his 

1 The older theory was misled by this into substituting, for the determinant 
"subjective valuation of the equivalent price," the "ability to pay" of the 
buyers, which is not exactly false, but is very one-sided. See the more exact 
statement in Conrad's Jahrbiicher, pp. 520, 527. 

2 This, and not subjective exchange value, is the important thing for the 
formation of price. See the Grundziige, p. 516. 

chap, vi FACTORS OF SUPPLY 221 

goods at a price low enough to find buyers for the whole stock 
he offers for sale. In the case of a stock of 1000 pieces, for 
instance, he will find his market at a price which is somewhat 
less than the valuation of the thousandth buyer, and somewhat 
higher than the valuation of the thousand and first If, now. 
the relations of production and sale are normal, the whole stock 
offered will, almost invariably, be taken off by the demand at a 
price which is far above the minimum use-value of the com- 
modity to the sellers, and which, beyond the full amount of 
costs, brings them a business profit. If the circumstances, how- 
ever, are unfavourable, it may well happen that the seller must 
seek for his market at considerably lower levels of demand, 
and be content to take prices which show a loss when compared 
with costs of production. But, as a rule, even those forced 
prices are still above the subjective use-value of the commodity 
to the seller, and the function of this subjective use-value, as 
lower limit of price, does not come into operation: It is only 
if the price should sink almost to zero that it would be checked 
in its descent by this latter limit, the valuation of the seller, 
finally coming into play. But it can scarcely ever come to 
this : in almost all cases the competition of buyers is suffi- 
cient of itself to stop the downward movement at a higher 
point on the scale. Thus, in regard to the prices actually 
established within a large and organised market, the law of 
price undergoes a great simplification. Of the four valuations 
which, as " valuations of the two marginal pairs," limit the 
zone within which price is determined, the valuations of the 
seller, for the reasons mentioned above, fall out altogether. 
But, if the buyers are very numerous, the interval between 
the figures which two successive buyers put on their valua- 
tion is so small, that the zone limited by the figure of the 
last buyer and that of the first unsuccessful competitor, is 
narrowed almost to a point. And so far as this is the case it 
may be asserted, with sufficient exactness, of the economic 
exchange which goes on in large markets, that the market price 
is determined by the Valuation of the Last Buyer. 1 

1 This may be a suitable place to finish the analysis of Scharling's argument, 
which I began on p. 160. Scharling explains (Conrad's Jahrbiicher, vol. xvi. 
p. 542) that in all essential respects he can agree with my theory of price ; only, 
he says, it does not go far enough. My "determinants," and even the deter- 


minants of these determinants, do not go to the very root of the explanation ; 
there is still something wanting ; and this something, this Schlussstein or " element 
which, in the last resort, determines the conditions for an exchange," Scharling 
Thinks that he has found in the " exertion (Anstrengung) which is spared the man 
who wishes ... to obtain possession of a good by the fact that the good is 
transferred to him, in the case in question, by the other party in the exchange" 
(p. 551). If Scharling here were to mean by Anstrengung the toil of production 
which must otherwise be expended, directly or indirectly, for the acquisition of the 
good, his proposition would be positively false (see above, p. 160 in note), and 
this, indeed, Scharling himself seems to see and, indirectly at least, to admit 
(pp. 531, 554). But he goes on to give this expression a wider meaning. Under 
it he now embraces, among other things, the exertion which it costs to induce an 
owner to part with his commodity (p. 554), or "to meet competitors " (p. 556), or 
" to meet other suitors by overbidding " (p. 558), or " to overcome the indisposition 
of the owner to part with the good " (p. 558), and so on. "The right of the owner 
to possess the good," explains Scharling in the most significant passage of this 
kind, " is the last hindrance which stands in the way of the buyer's acquisition of 
the same, and this is now the thing to remove. The exertion which is required for 
this determines the value, the conditions for the exchange " (p. 558). Now, what 
kind of " exertion " is this ? Scharling himself speaks of it more than once with 
all desirable plainness {e.g. p. 555, line 15 ; p. 558, lines 5, 16, etc.) It consists 
simply in the offering of a sufficiently high or higher price, in a bidding up or 
bidding higher. And now I ask : First, is there any justification, material or 
linguistic, for calling the offering of a price an " exertion," and, specially, for 
calling the offering of a price of £20 twice as great an exertion as offering a price 
of £10 ? Second, is- the " exertion " which consists in offering the purchase price, 
e.g. at an auction, spared the purchaser, or must he not rather take the exertion 
on himself if he is to obtain the good ? And, third and principally, is it explain- 
ing the formation of price, or going round about the explanation in a manifest 
circle, to account for the height of price by the amount of the exertion which the 
meeting of competition and the inducing of the owner cost, and then explain 
this exertion again as the offering of a sufficiently high or higher price ? Is this 
not rather to say directly ; — the price is high when and because much must he 
paid to get the good, and it is low in another case when and because but little 
need be paid ? "Who will be inclined to accept this as ' ' der Weishtit letzten 
Schluss," as the long -sought -for coping-stone of the theory of price? — And 
now one more remark in case of misunderstanding. I am very far from deny- 
ing that "difficulty of attainment " or " amount of toil of production " may, and 
very often actually does, afford one single important secondary determinant for 
the relation of want and provision for want, thereby for the height of marginal 
utility, and so, finally, for the amount of value. But this determinant only 
works in the way, and within the limits, which I have indicated in mj r theory 
(see in particular the statement of the "exceptional case," where the amount of 
a pain or strain averted determines the value of a good, Grundzuge, p. 42, and 
especially the statement of the influence of costs of production on value and 
price, p. 61 ; then pp. 521, 532, 534). On the other hand, the more extensive 
claim that Scharling puts forward with so much emphasis (vol. xvi. pp. 551, 552), 
that difficulty of attainment by itself alone is the last universal determinant and 
measure of value, I can only most emphatically reject. 




In the sphere of price, as in the theory of subjective value, 
we find a law firmly rooted in economic literature and 
accredited by common experience. It tells us that the 
market price of goods reproducible at will tends to equalise 
itself, in the long-run, with Costs of Production. The following 
perfectly valid line of argument is usually adduced in proof of 
this. The market price of goods reproducible at will cannot, 
in the long-run, be maintained either much above or much 
below their cost. If at any time the price of an article rises 
appreciably above the cost, its production will be particularly 
profitable to the undertakers. This will not only induce the 
latter to extend their already flourishing businesses, but will 
encourage new undertakers to enter the same remunerative 
branch of industry. Thus the amount of product brought to 
market will be increased, and finally — according to the law of 
supply and demand — a fall in price will ensue. If, conversely, 
at any time the market price falls below costs, continued pro- 
duction will show a loss ; many undertakers will reduce their 
output ; the supply of the commodities will be reduced ; and 
this, finally, in virtue of the law of supply and demand, must 
lead to a raising of the market price. 

Round this law of costs has gathered a great mass of theo- 
retical detail, 1 which may, for our purposes, be left entirely on 

1 Thus the question as to costs of production or costs of reproduction ; whether, 
in the case of a variety of costs, it is the highest, the lowest, or an average cost 
that is to he taken as standard ; what elements are to be reckoned among costs, 
and so on. 

224 THE LAW OF COSTS book.iv 

one side. Our whole interest is centred in the question as to 
the position which the law, so well accredited by experience, 
takes in the systematic theory of price. Does it run counter 
to our law of marginal pairs or not ? 

Our answer is that it does not. It is as little of a con- 
tradiction as we before found to exist between the proposition 
that the marginal utility determines the height of subjective 
value, and the other proposition that the costs determine it. 
The line of thought which, in both cases, leads to the solution 
of the apparent contradiction is the same, feature for feature ; 
except that, in the present case, in virtue of the intervention 
of exchange, — in virtue, that is, of the translation of the 
phenomena out of individual economy into social economy, — 
there appear richer developments at every station on the line 
of thought. 

In what follows I shall try, as briefly and clearly as 
possible, to describe the concatenation between Value, Price, 
and Costs ; and I think I am not exaggerating when I say that, 
to understand clearly this connection, is to understand clearly 
the better part of Political Economy. 

The formation of value and price takes its start from the 
subjective valuations put upon finished products by their con- 
sumers. These valuations determine the demand for those 
products. As supply, over against this demand, stand, in the 
first instance, the stocks of finished commodities held by pro- 
ducers. The point of intersection of the two-sided valuations, 
the valuation of the marginal pairs, determines, as we know, 
the price, and, of course, determines the price of each kind of 
product separately. Thus, for instance, the price of iron rails 
is determined by the relation of supply and demand for rails ; 
the price of nails, by the relation of supply and demand for 
nails ; and, similarly, the price of every other product made 
out of the productive good iron — such as spades, ploughshares, 
hammers, sheet-iron, boilers, machines, etc. — is determined by 
the relation between the supply and demand which obtains for 
these special kinds of products. To make this perfectly clear, 
let us assume that the relations between requirements and 
stocks of the various iron products — and, accordingly, their 
prices to begin with — are very various ; that the price of a 
quantum of commodity which can be made out of one and the 


same unit of productive material 1 — for instance, from a cwt. of 
iron — varies from 2 s. for the cheapest to 20 s. for the dearest 
class of products. These prices are the result of the position 
of the market at the moment, and we have first assumed that 
the stocks of products (the supply) are a given quantity. But 
they are only for the moment a given quantity. As time goes 
on, they are always getting supplemented from production, and 
this makes them a variable quantity. Let us follow the circum- 
stances of this production. For the manufacture of iron fabrics 
producers, of course, require iron. 2 Under the system of division 
of labour they must buy this in the iron market. The manu- 
facturers represent this demand for iron. As regards the extent 
of the demand, it is clear that every producer will buy as much 
iron as he requires to produce that amount of the commodity 
which he may expect to sell among his customers. But how 
will it be as regards the intensity of the demand ? Obviously 
no producer will give more for the cwt. of iron than he can get 
for it 3 from his own customers in the shape of price ; but, up 
to this point, even in the worst case, he can and will compete 
rather than let his production come to a standstill for want of 
raw material. The manufacturer, therefore, who can profitably 
jmrploy the cwt. of iron if he gets 20s. from his customers will 
be a buyer in the iron market up to the price of 20s. as 
maximum ; he who can profitably employ the cwt. of iron at 
16s. will, naturally, not buy at a price over 18s., and so on. 
In this way the market price which" each producer of iron 
wares gets for his particular wares (or the share of the market 
price which falls to iron according to the law of complementary 
goods) furnishes him with the concrete valuation which he has 
in his mind when joining in the demand for iron. 

1 To simplify the matter, we shall omit for the moment the co-operation of 
any other complementary means of production. 

2 Again, for simplicity's sake, I leave out the other requisites of production. 

3 It must be remembered that here we are making abstraction of the co-opera- 
tion of other complementary means of production, as Labour, Tools, Coal, etc. 
If otherwise, of course, according to the principles laid down above (p. 170) on 
the value of complementary goods, we should have to put a portion of the value 
of the product to the account of the other co-operating goods, and assign only a 
quota of the product's value to the iron. But, in that case, exactly the same 
relations, as are shown in the text to exist between the value of iron and the full 
value of the product, would hold between the value of the iron and that quota of 
the product's value. 


226 THE LA W OF COSTS book iv 

The supply, which stands over against this demand, consists 
of the stocks of iron held by the mine-owners and ironmasters. 
These stocks will pass, in methods familiar to us, into the 
possession of the most capable buyers, and at a price which, 
approximately, corresponds to the valuation of the last buyer. 1 
Suppose the stocks of iron are sufficient to meet the demand 
of all those buyers who value iron from 20 s. down to 6 s. 
per cwt., the valuation of the last buyer, and thus the market 
vC price of the iron, will stand at 6s. 

And now we have to consider the causal connection which 
has ended in this price. It runs, in the clearest possible way, 
in an unbroken chain from value and price of products to value 
and price of costs — from iron wares to raw iron, and not con- 
versely. The links in the chain are these. The valuation 
which consumers subjectively put upon iron products forms the 
first link. This helps, next, to determine the figures of the 
valuation — the money price at which consumers can take part 
in the demand for iron products. These prices, then, deter- 
mine, in methods with which we are now familiar, the 
resultant price of iron products in the market for such pro- 
ducts. This resultant price, again, indicates to the producers 
the (exchange) valuation which they in turn may attach to the 
productive material iron, and thus the figure at which they may 
enter the market as buyers of iron. From their figures, finally, 
results the market price of iron. 

But still another and very important connection may be 
gathered from all this. It is that here we have simply the 
great law of marginal, utility fulfilling itself. According to 
that law the available stock of goods is, successively, conducted 
into the most remunerative employments — put to the most 
advantageous uses, — and the last use to which the goods are 
put determines their value. In any individual economy the 
most remunerative uses are seen to be those which express the 
most urgent subjective wants, and the value which emerges, as 
result of these individual relations, is purely personal subjective 
value. In the more extended sphere of a market, on the 
other hand, everything is referred, no longer directly to sub- 
jective wants, but to those wants as mediated by money — 
money being, as it were, the neutral common denomination for 

1 See above, p. 221. 

chap, vii FROM PRODUCT TO COSTS 227 

wants and feelings of various subjects which are not immedi- 
ately commensurable. Here emerge, as the most remun- 
erative employments, not those which express the wants 
absolutely most urgent, but those which are represented 
by the highest money valuation ; that is, the best paying 
employments ; l and the value which results is objective 
exchange value. Thus it is, first of all, with iron products. 
In their respective markets they pass to the best paying 
buyers, and the price which expresses the valuation of the last 
buyer determines their market value and price. But so it is 
also, in the second place, in a slightly roundabout way, with 
the " cost good," iron, itself. In the iron market it goes to the 
best paying producers, and the valuation of the last of these 
determines its price. But here the producers are simply 
mediators. In their conducting of the iron to the best paying 
consumers, the stock of iron really passes successively to the 
most remunerative forms of consumption, and the last of these 
forms provided for determines — through the valuation named 
by the last producer who enters the market as buyer — the 
market price of the cost good, iron It is not this cost good, 
then, that dictates its fixed price to the products that proceed 
from it ; on the contrary, it receives its own price by the 
medium of the price of its products, in conformity with the 
great law of marginal utility, according to which the available 
stock is forced into the most remunerative employments, and 
receives its price from the money valuations of the last of these. 
But connected with this is a series of subsequent pheno- 
mena, which, obviously, have given rise to the opinion that 
costs exert a causal influence on the price of products. So 
long as the price of various products made from iron varies 
between 20s. and 2s., while the price of the unit of iron stands 
at 6s., it is an evidence that the economical principle which 
should guide the stocks of iron into the most remunerative 
employments is not fully carried out. Iron is being used in 
employments where the products fetch only 2s. or 3s., where, 
accordingly, the use is less than the " last " economically per- 
missible ; and, on the other hand, there are still numerous 

1 That these two, unfortunately, are not usually the same I have shown at 
length in Conrad's Jahrbiicher, pp. 510-513, when discussing the causes and effects 
of this fact. 

228 THE LA W OF COSTS book iv 

employments unprovided for, where the products would obtain 
a greater value than 6 s. If, for instance, the market price of 
an iron product stands at 20s., it is a proof that only those 
consumers of that product who value it at 20 s. and upwards 
are actually purchasing, while other consumers, whose valua- 
tions range from 18s. down to 6s., are not supplied in the 
market. Similarly with products whose market price stands 
at 16s. ; there will be an unsatisfied layer of demand, with a 
use for the product corresponding to the prices 14s. down to 
6s., and so on. Now this must be corrected — and the enterprise 
of undertakers will usually not be long in supplying the needed 
correction. The production of those iron wares, the price of 
which still stands above 6s., will, under the inducement of the 
premium offered by the difference between price and cost, be 
increased till all those employments where the utility is greater 
than the amount of 6s. are supplied. Of course this increase 
of supply has the effect of always reducing the level in which 
the "last" buyer is found, and thus the market price sinks, 
till such time as the money valuation of the last buyer, 
and with it the market price, comes to the normal level of 6s. 
Conversely, where iron has been put to employments whose 
products fetch less than 6s., the loss that ensues will prevent 
more iron being thus employed. This will be brought about by 
a temporary suspension or limitation of the production of those 
iron wares, the market price of which is under 6s. This limita- 
tion of supply will soon have the effect of raising the price to 
6s., and now, as the state of the case demands, the commodity, 
iron, will only be attainable by those buyers who can use it to 
make products that will fetch at least 6s. Thus, from above 
and from below, all iron products come together at the price of 
6s., the amount of their costs ; but, quite evidently, the cause 
of this is not that the cost good, iron, can force its own 
arbitrary fixed price on its products, but that all the products 
involved, including the cost good, iron, conform to the law of 
marginal utility, find their way successively into the most 
remunerative employments, and together receive their price as 
regulated by the last of these. 1 

1 It is possible that the amount of costs may itself be shifted — raised, for 
instance — by the process of correction just described. It may happen, that is to 
say, that in order to satisfy the demand, hitherto unsatisfied, which is desirous 

chap, vii FROM PRODUCT TO COSTS 229 

Empirical proofs of this may be had in abundance. It is 
a very well known fact that active building of railways raises 
the price of rails, and, through this, the price of iron ; that the 
present strong demand for copper wire in electric lighting puts 
up the price of copper. In these cases it is evident that the 
upward movement of price takes its start from the final 
products, and is transferred from these to the cost goods. 
But the objection will probably suggest itself to many readers, 
that there are also cases where the movement of price is 
from costs to products. The stocks of iron, for instance, of 
which we have been speaking in our illustration, are not a 
fixed amount, but are smaller or greater according to the 
circumstances of iron production. Now if there is an exten- 
sion of this production, and the supply of iron increases, its 
price will certainly fall, and that from causes peculiar to the 
iron ; and this fall in prices will drag down the price of iron 
wares. Does the causal connection here not run from costs to 
price of products ? 

To answer this objection we have only to carry the con- 
catenation, of which we have hitherto examined only a few 
links, back to its beginning. It is quite correct to say that 
stocks of iron are not a fixed amount, but the varying result of 
a production which is capable of being extended or limited at 
will. For the production of iron two things are necessary, — 
mines, and (to put it shortly) direct and indirect labour. 
The mines are a given quantity, and cannot be devoted to 
the production of anything but iron. On the other hand, 
the quantity of labour available as a whole for economical 
employment, is an amount given and limited by the current 
state of population, but this is not the case with that particu- 
lar labour which is employed in the production of iron. Labour 
is a productive power capable of being employed in any number 
of ways, and all the branches of production carried on in the 
community compete for it. Who or what, now, is it that 
decides what exact proportion of the original productive powers 

of buying iron products at a higher price than 6s., so much iron is taken out of 
the iron market that the stock is no longer sufficient for the demand that is 
willing to pay just 6s. This latter, then, will, of course, be shut out by the 
stronger competitors, and the market price settles at a higher figure than 6s. — 
another proof that costs are not the fixed point to which the price of products 
adapts itself, but vice, versd. 

230 THE LA W OF COSTS book iv 

at the disposal of industry, namely labour and uses of land, is 
employed in the production of iron, and who and what is it that 
decides on the value and price of the unit of those productive 
powers ? 

Here, then, for the last time, is repeated, in the elements 
of all economy, the movement which we saw in the case of 
final products and intermediate products. The original pro- 
ductive powers of the nation force themselves into the most 
remunerative employments one after another, and receive their 
value and price from the last of these. As little as, perhaps 
even less than, any other good have they any a priori fixed 
value : they receive it only from the opportunities of employ- 
ment. Whether the day's work is worth 2s. or 6s. depends 
on the worth of the product which can be turned out in the 
day's work, and, indeed, on the " last " product — the one worst 
paid — for the production of which there is still enough labour 
of the necessary quality left, after all the better paid employ- 
ments have been supplied. 

Production may be compared to a giant pump. Every 
branch of want has its separate pipe sunk down to the great 
reservoir of the original productive powers, and competes with 
all the other branches of want in trying to draw its supply 
by suction from that reservoir. Every branch has a different 
power of suction, the power increasing with the number and 
the remunerativeness (that is to say, in the case of organised 
exchange, the money value) of the employments it embraces. 
In the nature of the suction pipes, too, there is a difference. 
Many are quite simple : others have independent intermediate 
lengths, that convey the pressure that comes from the want, 
as it were, by stages ; and, in correspondence with that, the 
productive powers which supply the want are raised by stages. 

The simile extends still further. Such wants as demand 
personal services for their satisfaction, attract labour quite 
directly, according to the payment which they can and will 
give for them. Such wants, again, as demand material goods 
for their satisfaction, get these supplied, first, by payment of a 
market price which is remunerative in itself, and then the 
remunerative price of the products must attract the productive 
powers to their manufacture. Sometimes this is done through 
one or two, sometimes through twenty or thirty, members. In 


our illustration, human demand asked and paid for iron wares : 
the market price of iron wares attracted people to the purchase 
of iron : the price of iron, finally, attracted the original pro- 
ductive powers to the production of iron. In the case of 
other consumption goods, the number of intermediate members, 
or, to keep to the terms of our comparison, the number of 
intermediate lengths in the suction pipe, may be double or 
twenty times as great. But the principle of the movement, 
and what chiefly interests us, the result, is always the 
same. Whether there are many or few intermediate mem- 
bers may hasten or hinder the result, but it cannot weaken or 
strengthen it ; in the end every want, according to the power 
expressed by its money valuation, draws to itself, mediately or 
immediately, the productive powers required for its supply. 
To supply the wants of the rich innumerable productive powers 
are always active, even if, simultaneously, at other points of 
the economy, there is want both of men and goods. The 
reason of this is that the high figures, which the rich are able 
to offer for the satisfaction of their wants, never fail to exert 
and continue their attractive force through all the stages of 
production, right down to the reservoir of the original productive 

Thus all human wants exert, as it were, a suction power 
indicated by the figures of their valuation. Now, that layer of 
wants which is willing and able to pay, say, 20s. and upwards, 
for the day's work devoted (mediately or immediately) to its 
satisfaction, is soon entirely provided for. After it those layers, 
in succession, draw supply to themselves which can and will 
pay the day's labour with 18s., 16s., 14s., and 12s., even down 
to 10s., 8s., 6s., and 4s. If, at the limit of 4s., the entire stock 
of original powers is required and is taken, this decides two 
things : — All wants which will not, or cannot, pay the day's 
labour devoted to their service at 4s., remain unsupplied ; and 
the market price of the day's labour will stand at the figure of 
the last buyer, namely, 4s. But if, as we may rather assume, 
the available quantity of labour is greater than this, the wants 
of still lower levels may be supplied. The last needs — mediate 
or immediate — which are supplied may be those that pay the 
day's labour at 2s. only ; and, in conformity, the market price 
of labour also will be fixed at this lower figure of 2s. And, 

232 THE LA W OF COSTS book iv 

indeed, this market price will be a general one : the uppermost 
layer will not be paid 20s,, and the lowest layer 2s. for the 
same work or the same commodity : the market price will be 
the same for all buyers. 

And now we come in sight of the answer to the doubt 
suggested by our former illustration. Suppose that the price 
of the day's labour is 2s., and the price of a cwt. of iron, which 
takes three days to produce, is 6s. Suppose now that, all of a 
sudden, new and productive mines are opened, or some great 
improvement in process discovered, which makes it possible to 
produce the cwt. of iron in two days' labour. What is the 
consequence ? So long as the iron and its products maintain 
the old price of 6s., only those wants in the department of 
iron wares are supplied which are able and willing to pay 6 s. 
for two days' work ; that is, to pay the day's labour at the rate 
of 3s., while all round, in all other departments of want and 
branches of production, that layer of want is supplied which 
pays only 2s. for the day's labour. On economic principles — 
which are willingly carried out by undertakers of industry, who 
are always ready to seize the chance of a profit when offered 
them — those opportunities of employment which pay the day's 
work at more than 2s., and have hitherto been unsupplied, 
will now be supplied : more original productive powers will, 
accordingly, be invested in the production of iron ; and the 
supply of iron and iron products will be increased till such 
time as, here as elsewhere, that level of wants which is willing 
to pay the day's labour at 2s. is satisfied, and therefore the cwt. 
of iron, which costs two days' labour, fetches 4s. Parallel with 
this, of course, the price of iron and iron products 1 goes down 
to the level of 4s. And all this is not in opposition to, but in 
real fulfilment of our law of Marginal Utility, of which the law 
of costs, rightly understood, is only a special expression suitable 
to a special group of phenomena. 

1 It must not be forgotten that we are simplifying the matter by leaving out 
of account the co-operation of other complementary goods in the production of 
iron products. If we were to take these into consideration, and assume, for 
instance, that, to change the iron into the iron product, the expenditure of other 
two days of immediate or mediate labour was necessary, then 8s. , as the price of 
iron product, would correspond to 4s. as the price of iron, and of this, according 
to the law of complementary goods, 4s. would be reckoned to the productive good, 
iron, as its share. 

chap, vii DISTURBING CAUSES 233 

If — what is practically inconceivable — production were 
carried on in ideal circumstances, unfettered by limitations 
of place and time, with no friction, with the most perfect 
knowledge of the position of human wants requiring satis- 
faction, and without any disturbing changes of wants, stocks, 
or technique, then the original productive powers would, 
with ideal and mathematical exactitude, be invested in the 
most remunerative employments, and the law of costs, so far as 
we can speak of such a law, would hold in ideal completeness. 
The complementary groups of goods from which, in the long- 
run, the finished good proceeds, would maintain exactly the 
same value and price at all stages of the process ; the com- 
modity would be exactly equal to its costs ; these costs to their 
costs, and so on, back to the last original productive powers 
from which ultimately all goods come. But this ideal sym- 
metry is traversed by two disturbing causes. 

The first of these 1 may call by the general name of 
Friction. Almost invariably there is some hindrance, great 
or small, permanent or temporary, to the due investment of 
the original productive powers in the employments and forms 
of consumption which are the most remunerative at the time. 
In consequence the provision for wants, and likewise the prices, 
are somewhat unsymmetrical. Sometimes it is that individual 
branches of want are, relatively, more amply supplied than 
others ; so that, for instance, in woollens, those wants are supplied 
which pay the day's labour indirectly at Is. 8d. only, while it 
may be that, in copper goods, no wants are satisfied which can- 
not pay 3s. for a similar day's labour. But sometimes it may 
be that groups of productive materials, successively transformed 
till they are changed at last into the finished commodity, are not 
equally valued at all stages of the process. If we compare the 
means of production to a stream, we might say that the stream is 
not, as it should be, of equal breadth at all stages of its course : 
from some disturbing cause or other there may be dams at 
certain particular points, and leakages at others ; and these cause 
an unsymmetrical divergence of price compared with the prices 
obtained at stages before and after, or, as it is usually con- 
ceived and expressed, a divergence of the price of a product (or 
intermediate product) from its costs. Thus it is, in our illustra- 
tion of the iron, when production is suddenly cheapened from 

234 THE LA IV OF COSTS book iv 

6s. to 4s. As a consequence the production of iron is at first 
increased, and presses down the price of raw material, while 
the products of iron may still for some time maintain a price 
greater than their costs. But gradually the increase of supply 
presses forward to the later stages of production, — passes from 
the production of raw materials to the manufacture of final 
products, — and by reducing the price here also to 4s. restores 
the disturbed symmetry between price and costs. 

In practical life such frictional disturbances are innumer- 
able. At no moment and in no branch of production are 
they entirely absent. And thus it is that the Law of Costs 
is recognised as a law that is only approximately valid ; a 
law riddled through and through with exceptions. These in- 
numerable exceptions, small and great, are the inexhaustible 
source of the undertakers' profits, but also of the undertakers 

The second disturbing cause is the Lapse of Time — the 
weeks, months, years which must stretch between the inception 
of the original productive powers, and the presentation of their 
finished and final product. The difference of time, in exerting 
a far-reaching influence on our valuation of goods, makes a 
normal difference between the value of the productive groups 
standing at different points of the production process through 
which they must all pass ; and is, therefore, a difference to be 
kept quite distinct from the unsymmetrical divergences caused 
by frictional disturbances. It is this second disturbing cause 
which gives rise to Interest. Our further task will be to 
intercalate the theory of interest in its place within the value 
and price theory already outlined. 





Present goods are, as a rule, worth more than future goods 
of like kind and number. This proposition is the kernel and 
centre of the interest theory which I have to present. All 
the lines of explanation, by which I hope to elucidate the 
phenomena of interest, run through this fact ; and round it, 
both essentially and superficially, is grouped the whole of the 
theoretical work we have to do. The first part of our ex- 
planation will try to prove the truth of the proposition ; the 
second will then show that, out of the fact, spring, naturally 
and necessarily, all the manifold forms which the phenomena 
of interest take. In the present book we have to take up the 
first part, and I shall try to go into it with that minuteness 
which is due to the cardinal importance of such a proposi- 
tion. To this end we shall, first of all, make a general sur- 
vey of the relations between present and future in human 
economy — a subject, obviously, of the highest importance, but 
one which, strangely enough, has up till now attracted but 
scanty scientific attention. 1 

1 A history of the theory of this subject — which I have no intention of 
writing here — would probably start with Adam Smith's emphatic opposition of 
"present enjoyment" to "future profit" (ii. 1). In more recent times there 
are some good observations on the subject in Senior {Political Economy, third 
edition, p. 58) under the headings of " Abstinence " and " Capital " ; in Rae {New 
Principles of Political Economy, quoted in Mill's Principles, book i. chap, xi.); 
and in Menger {Grundsdtze der Volkswirthschaftslehre, p. 127). The first, so 
far as I know, to treat it as a subject by itself, was Jevons {Theory of Political 
Economy, 1871, second edition, 1879). Jevons's work is exceedingly interesting 
and suggestive, but, on the whole, it is rather imperfect — as could scarcely be 
otherwise in a first attempt, and on a field of speculation hitherto all but un- 
touched. It shows a good deal of incorrectness, a good many contradictions, 
and, in particular, many obvious gaps. Jevons may be said rather to have 


In the present we live and move, but our future is not a 
matter of indifference to us, and our desires are, with reason, 
directed towards a wellbeiDg not limited by the present. It is 
only as the logical carrying out of this general principle that 
we set before us, in our economical arrangements, the larger 
object of providing for our future as well as for our present 
wellbeing. As a fact, the future has a great place in our 
economical provision ; a greater, indeed, than people usually 
think. It is, of course, a commonplace, but, all the same, it 
is a truth seldom seen in all its bearings, that our economical 
conduct has exceedingly little reference to the present, but is, 
almost entirely, taken up with the future. 

shown, by a bold stroke of genius, that here was a new circle of ideas waiting 
to be taken up, than shown what was to be done with them. Closely following 
Jevons, without going beyond their master, are, quite recently, Launhardt 
{Mathematische Begriindung der Volkswirthschaftslehrc, 1885) and Emil Sax 
{Grundlegung der thcoretischen Staatswirthschaft, 1887, pp. 178, 313). A little 
before these G. Gross {Die Zeit in der Volksioirthschaft, in the Zeitschrift fiir die 
ges. Staatswissenschaft, 1883, p. 126) had made a well-meant suggestion, — which, 
however, was by that time carried out by Jevons and then by myself, — that the 
element of time in economical theory was worthy of a fuller consideration. 
Finally, as concerns my own work, I owe it to myself to say that I arrived at 
my views on this subject in complete independence, and altogether uninfluenced 
by Jevons — and, naturally, still less by later writers. I first became acquainted 
with Jevons's writings in 1883, — shortly before the printing of my Capital and 
Interest, — when completing the historical material already collected in that work 
by a review of the latest English literature on the subject. The principles of 
my own theory of capital, on the other hand, were laid down by me as early 
as 1876. In that year I first suggested them in a youthful work never published. 
In later writings I gave many plain, if still cautious, hints of my leading ideas 
{e.g. in Rechte und Verhaltnissc, p. 68 in note on the phenomenon of Abniitzung, 
pp. 76 and particularly 109, 115 in note, on the computation of the future use, 
and p. 152 ; in Oapital and Interest, pp. 257, 276, 343, 424, and particularly 
on p. 428 where I formulated the programme of my positive theory in saying 
that the explanation of interest was to be deduced from the influence of Time 
on human valuations of goods). The cautious tone which I still deliberately 
adopted in giving these hints was due to my desire not to compromise my new 
ideas by any premature or incomplete formulation of them. I meant that they 
should not go before the public till I was in a position to produce them as a 
finished whole, all harmoniously fitted in to a system of carefully planned 
economic doctrine. That is why I preferred to work for ten years at laying 
the foundation of the present theory by completing the theory of goods (1881), the 
tiiticism of the theories of capital (1884), and the theory of value (1886), rather 
than snatch, as I might easily have done, at the glory of priority by publishing 
original but still immature ideas a decade earlier. Moreover my theory, if it 
touches that of Jevons at several points, by no means agrees with it in essence ; 
and in the most important points, such as the explanation of interest, it is in 
distinct opposition to his. 

chap, i JEVONS 239 

Let us clearly understand what this latter statement 
means. It means that our anxiety in the present is to have 
at our disposal, in the future, means for the satisfaction of 
wants that will not emerge till the future. In other words, 
it means that pleasures or pains, which we will only experience 
in the future, determine us now to provide goods or services, 
which, again, will only assert their use in the future. But 
how is it possible that feelings which are not yet felt, and 
therefore feelings which, essentially, do not exist, can he 
motives to will and deed ? 

Now, as a suggestive writer has said, we do not indeed 
possess the gift of feeling future sensations, but we possess the 
other gift of anticipating them in imagination. 1 Either it is 

1 When Jevons calls that intellectual phenomenon which impels us to provide 
for future wants and to value future goods, a "present anticipated feeling" 
{Political Economy, second edition, p. 37), the expression is very apt to be mis- 
leading. We must distinguish between two fundamentally distinct things, 
which Jevons seems to me not to have sufficiently kept apart. It is one thing 
to represent to ourselves, or imagine, a future pleasure or future pain, and to 
estimate its presumable intensity on the ground of this imagination. It is quite 
another thing to experience, in this imagination itself, a pleasure, an actual 
present pleasure of anticipation. To give an example. I think of taking a 
pleasure trip to Italy. From personal experiences, or from travellers' tales heard 
or read, I represent to myself the pleasures of the journey, and I put the intensity 
of these pleasures so high, that it seems to me worth the sacrifice of £50 to 
realise them. But, beyond this, in picturing to myself the future pleasure of 
the journey, a real present pleasure of anticipation is kindled. Thinking on 
the journey affords me an actual pleasure, but, in any case, it is an entirely 
different pleasure and, in all probability, its intensity is ever so much less than 
the pleasure of the journey itself. If I value the latter at £50, the pleasure of 
anticipation is, perhaps, not worth more than 10s. — of which it may be sufficient 
proof that I am willing to lay out so much money, and no more, in buying a 
book of travels that lifts me into the pleasant world of thought. The concrete 
figures here are of no moment. No constant or normal quantitative relation can 
be established between an anticipated pleasure and a pleasure of anticipation : the 
relation will vary in the wildest way according to persons, motives, and circum- 
stances. With dreamy imaginative men, for instance, who are apt to be strongly 
excited by their own imaginings, the pleasures of anticipation may be relatively 
strong; with hard- headed unimpassioned men, on the other hand, they will be 
disproportionately weak. For our purpose it is sufficient to establish two things : 
first, that the intensity of the represented future pleasure and that of the actually 
felt pleasure of anticipation, are two different quantities ; and second, in the vast 
majority of cases, the intensity of. the pleasure of anticipation is less than the 
anticipated pleasure, not by a few per cent, but infinitely. 

The question now is : When we value future goods, and when in conformity 
with that valuation we are making these economical determinations on which we 
provide for future wants, with which of these two intensities havo we to do ? On 


that we have already in the past, once or many times, experienced 
the same want as we expect in the future, and retain a picture 

this, at any rate, there can be no doubt : we shall all agree that it is the intensity 
of the future pleasure (or of the averted future pain) valued on the representation 
or imagination of it. A good which I have every reason to expect will bring me 
an intensity of satisfaction indicated by 100, I shall value at 100 and not at 1, 
even if, in anticipating the same, I experience only au actual pleasure of anticipa- 
tion of the intensity 1. And, in the same way, in choosing whether I shall 
provide for any definite future want, in general, or to which of several I should 
give the preference, I shall try to decide, as impartially as possible, according to 
ray reasonable valuation of the future pleasure, and not according to the degree 
of ray momentary feeling of pleasure. (That we not seldom have our clear judg- 
ment clouded by the latter, and that it thus obtains an indirect influence on our 
determinations, is a phenomenon which belongs to quite another sphere.) If, 
after what has been said, there should still be any doubt on the subject — which 
I do not anticipate — it may be removed by pointing to the well-known fact, that 
enthusiastic dreamers, in whom the anticipation of future events excite, very 
lively present emotions, are not at all the sort of people who are given to provide 
economically for their future needs in the most efficient way. On the contrary, 
it is the cold calculating men who do so ; men whose sober intellectual judgment 
of future situations is little or not at all affected by accompanying excitement. 

Now Jevons has fundamentally confused these things. He makes out that 
our economical transactions have for their motive present feelings, which, accord- 
ing to the distance of time, remain a few per cent behind the intensity of future 
pleasures and pains — standing to the latter, perhaps, in the ratio of 95 to 100. 
But nothing is more certain than that, while we represent to ourselves feelings of 
that intensity and anticipate them, we do not experience them as present feelings. 
Sax, again, who, in this respect, has obviously followed Jevons without proving 
the facts of the case for himself, has made the same blunder in a ruder way. 
He speaks of a Vorempjindung of future wants — to be distinguished from a 
simple prescience (Grundlegung, p. 178), and out of these "previous feelings" 
he even construes actual "present wants" and "feelings of want," which should 
be only a little weaker, according to the distance of time, than the corresponding 
immediate want of the present itself (p. 314). Surely Sax has scarcely considered 
what tortures we must constantly endure if all the future pleasures and pains, 
against which we protect ourselves by forethought, are really to be experienced 
by us in auticipation, and only a few per cent less vividly than in reality ! — Let 
me add the following remark. I am quite aware that the psychologists attach 
two distinct conceptions to the words "feeling" and "sensation" (Gefilhl and 
Empfindung). The speech of economics, however, has not yet carried out this 
distinction and it is usual to speak either of sensations or feelings of want, pain, 
and so on. I retain these common expressions because, by giving them up, I 
should probably lose more, among economic readers, in plainness, than I could 
gain in exactness. 

Note by Translator. — I may suggest here that, so far as concerns Jevons, the 
above criticism scarcely applies. It is based on a literal reading of two unfortunate 
expressions, " present anticipated feeling " and " vague though powerful feeling of 
the future." The whole passage, however, shows that Jevons did not mean the 
present feeling, but the represented future feeling — what he himself calls the " actual 
amount of feeling anticipated." The criticism, however, probably finds its mark in 
those German writers who have too faithfully followed the letter of Jevons. — W. S. 

chap, i ANTICIPATION 241 

of it in our memory ; or, at least, we have already experienced 
wants or feelings that bear a certain resemblance to the feelings 
we are expecting, and can, from such analogous reminiscences, 
construct for ourselves an imaginative picture which is more 
or less true. On such pictures of memory and imagina- 
tion we base our economical calculations and our economical 
decisions. Certainly, as many a one will be apt to object, it 
is an unsafe and deceptive foundation, but, all the same, it is 
almost the only one that we have. It is the rarest possible 
thing for us to base a valuation of goods, or an economical 
decision, on a pain that we are feeling at the very moment. 
It is, indeed, one of the characteristics of a civilised community 
that it anticipates want by providing for it, and does not 
allow the pain of emptiness, which the unsatisfied want would 
involve, to get to its full height. We do not begin to prepare 
our meals when hunger has reached its highest point of 
torment : we do not wait till the flood has overwhelmed house 
and home before we think of putting up the dam : we do not 
delay building the fire-engine till the flames have broken over 
us. At the moment when we decide on an economical action, 
the wants which cause us to make the decision are, almost 
always, in the future, and so, however near that future may 
be, they are acting on us, not as actual feelings, but as simple 
anticipations. How many a man has never, even in the past, 
fully felt the want which makes him value the goods he daily 
uses ! How many rich people know only from hearsay what 
real hunger is ! 

Hence it is obvious that, however deceitful and unsafe this 
gift of anticipation may be, and however far astray it may lead 
us in individual cases, we still have every cause to be heartily 
thankful that we have it. Otherwise, neither actually feeling 
the future wants, nor yet forewarned of them by anticipation, 
we could not, of course, provide for them in advance ; once 
want had made itself felt, any measures we could take would 
be miserably inadequate to provide for it ; and, poorer than the 
poorest savages, we should drag out a hazardous hand-to-mouth 

But economical action means something more than thinking 
generally about the wants which are to be provided for. As, 
indeed, all economising arises from the quantitative insufficiency 



of the means of satisfaction as compared with the wants requir- 
ing satisfaction, so it demands a constant selection, a constant 
choosing between those wants which can and should be pro- 
vided for, and those others which cannot be provided for. The 
selection naturally proceeds on a comparison of the importance 
and urgency — or, as we may say, the intensity — of the feelings 
of pleasure and pain which are associated with individual wants 
and their satisfaction. Now, if it is seldom that, in the moment 
of an economical decision, we actually feel that one want to 
which it refers, it is much more seldom that, on the moment of 
our choice, we experience, as actual feelings, all those sensations 
of pleasure and pain between which we have to choose. Our 
comparisons must, almost invariably, be, partially and very 
often completely, made on imaginative anticipations which we 
make of future feelings. And this leads us to a fact which 
I should like to emphasise: The future feelings we imagine 
are commensurable. They are commensurable with present 
actually-felt sensations, and they are commensurable with one 
another, and that too without reference to whether they belong 
to the same or to different levels of time. It is as easy for 
me to choose between a pleasure which seems desirable at the 
moment and another pleasure which I can obtain in eight 
days, as between two different pleasures which are both 
obtainable in eight days, or, again, as between two pleasures 
of which the one is obtainable in eight days, the other in eight 
months, or eight years. 

The fact that ve borrow from future sensations the motive 
for our present actions, is one side of our connection with the 
future. Another side is that, by our present actions, we prepare 
goods or material services 1 for the benefit of the future. If 
we analyse the totality of goods which constitutes our wealth 
we shall find that by far the greater part has the character of 
what, for want of a better name, we may call " future goods " 
(Zukunftsgiiter). All productive goods, without exception, are 
destined altogether to the service of the future. Durable con- 
sumption goods give off only a fraction of their material 
services in the present, and all the remainder in the future. 
If a dwelling-house, for instance, remains occupied for a 
hundred years, and affords shelter and comfort all that time, 

1 On the conception of Material Services see Capital mid Interest, p. 223. 


only an infinitesimal fraction of these services is rendered to- 
day; a still very small fraction is rendered in the present year; 
the great bulk of the service is spread over remote future periods. 
Even in the case of those perishable goods, such as meat and 
drink, wood and candles, which we keep ready for immediate 
consumption in our domestic economy, only one portion of their 
use is, strictly speaking, devoted to the service of the moment ; 
the greater part is carried over into the future, although it may 
be the immediate future. As, among our motives, future feel- 
ings are the dominant ones, so, among the goods we possess and 
use, " future goods " occupy the larger place. 

And there is yet another important analogy. As future 
feelings, whether they belong to the near or to the far future, 
are commensurable, alike with one another and with present 
feelings, so are future goods commensurable, alike with one 
another and with present goods. We can compare the value 
of a camellia which fades in an hour, with that of a ticket 
for a next week's concert, or with that of a bunch of next 
year's roses ; or we can give one of these goods for the other. 
It makes no difference to the matter whether the " future 
good," which we compare or barter, is at hand and ready for 
delivery now, or whether it is represented in bodily shape by 
nothing more than the means of production out of which it 
will come, or whether, at the moment, it is neither itself ready 
nor is capable of being palpably represented — is, that is to say, a 
" future good," in the narrowest and strictest sense of that word. 
Thus we give present money in exchange, not only for the 
present consumption good Bread, but also for the present 
productive good Meal, in which the future good, bread, lies 
concealed. But just as easily can we buy from a farmer, for 
money down, his next year's harvest. In " reserved seats " we 
buy the future services of actors and singers. In buying 
Consols we give our present money for a series of future pay- 
ments. Future goods and services are to us — I have cause to 
emphasise this — entirely familiar objects of economic dealing, 
just as future feelings are entirely familiar economic motives. 
Both have their ultimate ground in the continuity of our 
personal life. What we shall experience in a week or a year 
hence affects us not less than what we experience to-day, and 
has, therefore, equal claims to be considered in our economic 


arrangements. Both arrangements have for their end our 

Whether this theoretically similar claim of future and 
present is always fully recognised in practical life, is another 
question which will require much consideration. 

Provision for the future makes no inconsiderable demands 
on our intellectual strength ; makes some demands, even, on 
our moral strength ; and these demands are not equally met 
by men at all stages of civilisation. The present always gets 
its rights. It forces itself upon us through our senses. To 
cry for food when hungry occurs even to a baby. But the 
future we must anticipate and picture. Indeed, to have any 
effect in the future, we must form a double series of antici- 
pations. We must "be able to form a mental picture of what 
will be the state of our wants, needs, feelings, at any particular 
point of time. And we must be able to form another set of 
anticipations as to the fate of those measures which we take at 
the moment with a view to the future. Our knowledge of 
causal processes must enable us beforehand to form an -adequate 
picture of the forms which goods will take, of the quantity of 
them, and of the time when they will come to maturity as result 
of those productive or commercial activities which we are now 
commencing. To make this double work of anticipating a 
comparatively remote future clear and true to fact, is not 
possible to the infant, and not much more than possible to the 
child and the savage. Civilisation of course teaches us this 
difficult art gradually. But, even among the most advanced 
peoples, the art is still very far from being perfect, and the 
practical economic provision for the future is correspondingly 
inadequate. But, be the degree of anticipation and provision 
for the future what it may, wherever it exists in the most 
general way — and that is even among the most barbarous tribes 
— future goods and future services are as much actual objects 
of economical dealing as present goods. We strive to get them ; 
we produce them ; we value them ; we buy and sell them. 

I say, we value them ; and this is a point that must be 
looked more closely into. On what principles do we estimate 
the value of future goods ? The answer is : On the same 
principles as we estimate the value of goods in general : that 
is, according to the marginal utility which they will briiig us 


in the circumstances, of Want and Provision for want. But 
here, naturally, we have not to deal with the relations of want 
and provision that obtain at the moment, but with the want 
and provision of that future period when the goods in 
question will be at our disposal. To the inhabitants of a 
besieged town, threatened with starvation, grain that was 
promised for delivery a year after the raising of the siege would 
certainly not be valued and paid according to the standard of 
the moment's need ; while, on the contrary, a brewer who, in 
January, concludes a purchase for a hundred cubic feet of ice 
to be delivered in July of the coming summer, will, just as 
certainly, not measure the value of the ice according to the 
over-supply that obtains at the moment when the bargain is 
concluded, but according to the scarcity which is likely to come 
with the summer. 1 

Very frequently, however, there enters into the valuation of 
future goods an element which causes us to value them a little 
— or even a great deal — under their future marginal utility, 
but which — as I shall show presently — has no connection with 
the phenomenon of interest. This is the element of Uncertainty. 
To us nothing future is absolutely certain. However closely 
we may have bound present and future together in economical 
connection, and however much reason we may have to expect 
the future to bring certain goods into existence, or put them 
at our disposal, still the actual fulfilment of our expectations 
is never, in the strict sense of the word, certain : it is always 
more or less probable. Of course, the probability is often so 
great that, practically, it amounts to certainty : as, for instance, 
the expectation that payment will follow an acceptance by the 
Eothschilds. In such cases we do neglect the infinitely small 
amount that is wanting of full certainty, and deduct nothing 
from the valuation we put upon the acceptance on the 
ground of uncertainty. But, frequently, the probability falls 
considerably short of full certainty. The farmer, for instance, 
may have done everything in his power to obtain a harvest by 
ploughing, manuring, sowing, and so on : but the harvest may 
be destroyed, wholly or in part, by hail, frost, flooding, or 
insect ravages. Sometimes, indeed, the probability sinks to 
the level of a very faint possibility, as, for example, when a 

1 Menger. Grundsatze. p. 124. 


man holds one of a hundred tickets in a lottery where there is 
only a single prize. 

Cases like these cause a certain amount of hesitation to 
economic men. Are they to value uncertain future sums of 
goods exactly as if they were certain ? Impossible ! For then 
every lottery ticket that carried the chance of winning £100 
would be valued at £100, and every claim, even the most 
doubtful, at its full nominal amount ; — a course which, 
obviously, would land the men who tried to do business on 
these lines in the bankruptcy court in the shortest possible 
time. Or are the uncertain future sums of goods not to have 
any value put upon them ? is no importance whatever to be 
attached to them with respect to our wellbeing ? As impos- 
sible, and as ruinous ! For then no man would give the smallest 
price for a chance in a lottery, or even for nine hundred and 
ninety-nine chances out of a thousand ; no one would dare to 
make the slightest sacrifice to sow when harvest was uncertain. 
From this dilemma there is only one escape : we must ascribe 
to uncertain future sums of goods an importance as regards 
our wellbeing, but, at the same time, we must take account 
of the uncertainty of their acquisition according to the degree 
of that uncertainty. But, practically, this cannot be done 
otherwise than by transferring the gradation from where the 
gradation exists, but cannot be expressed — that is, from the 
degree of probability, — to where the gradation is not, but 
where alone it can be expressed — that is, the degree of the 
expected utility : thus equalising a greater, but less probable 
utility, to a less, but more probable utility, and this again to a 
still less but absolutely certain utility. In a word, we reduce 
all possibilities of utility to certainty, and restore the balance 
by deducting from this utility or value the amount we must 
add to the probability of the expected utility to raise it to 
certainty. Thus we reckon a claim on the Eothschilds at its 
full nominal value (disregarding for the moment the discount, 
as belonging to an entirely different sphere of phenomena), 
while one lottery ticket of a thousand, where the chance is a 
prize of £100, we value perhaps at 2s., one of a hundred at 
20s., and one of ten, perhaps, at £10. 

Strictly looked at, this kind of valuation — except where 
the certainty of the anticipated future utility is practically 


assured — is always incorrect. 1 For, to recur to our illustration, 
the ticket will either draw the prize or it will draw a blank. In 
the former case it will have been, as the events show, worth a 
hundred pounds ; in the latter, worth nothing at all. In no 
case will it have been worth 2s., or 20s., or £10. But, how- 
ever false this method of valuation is. in the individual case, 
it comes at least approximately right, according to the law of 
averages, over a great many cases ; and, in the absence of any 
better method of valuation — which is denied us by the dulness 
of our imaginative forethought — it is well justified as a 
practical make-shift. 2 

I repeat that the element of uncertainty, which is the 
cause of a lesser value being put upon particular classes of 
future goods, has no causal connection with the phenomenon 
of interest. The lesser valuation which is its effect is a special 
one, and extends to one class of future goods only, 3 and there 
it bears the character of a deduction as premium for risk. 

With the exception of this peculiarity, the valuation of 
present and future goods is made on identical principles. But, 
to conclude from this that the amount of value of present and 
future goods must be identical, would be too hasty. On the 
contrary, since present goods are available at a different time 
from future ones, and therefore come under different actual 
circumstances, and are intended for the service of a different 
set of wants, it is to be argued, from all we know about value, 
that the value of such goods must, as a rule, be different. 
And so it is in fact. We arrive thus at a proposition which 
is a fundamental one in our inquiry : As a rule present goods 

1 This proposition has lately been dispnted by Mataja {Das Rccht cles Schadcner- 
satzes vom Standpunkte der Nationalokonomic, Leipsic, 1888, p. 149, note 1) 
on the ground that, in the selling of such goods, one might actually obtain their 
average return as price, and therefore, quite correctly, value them according 
to this. But Mataja forgets that the market price is not the cause, but is itself 
the result of the fact that the individuals, who appear as buyers and sellers of 
such goods, value them in tJic first instance — that is, in the individual case, object- 
ively falsely — according to the average return. 

2 See my former tract on Rechte und Verlidltnisse, p. 85, where I brought 
out the same idea in a somewhat different connection : also Mataja, ibid. p. 

3 It embraces also goods which, materially, are present, but are intended for 
future consumption ; for instance, productive goods, the technical transfor- 
mation of which into consumption goods is accompanied by a danger of not 


\S have a higher subjective value than future goods of like kind 
and number. And since the resultant of subjective valuations 
determines objective exchange value, present goods, as a rule, 
have a higher exchange value and price than future goods of 
like kind and number. 

This phenomenon is the result of the co-operation of a 
number of causes ; — causes which, individually, are of very 
different natures, but which, as it happens, work in the same 
direction. These causes we shall consider in order. 




The first great cause of difference in value between present 
and future goods consists in the different circumstances of 
want and provision (Bedarf unci Deckung) in present and 
future. Present goods, as we know, receive their value from 
the circumstances of want and provision in the present : future 
goods from the same circumstances in those future periods of 
time when they will come into our disposal. If a person is 
badly in want of certain goods, or of goods in general, while 
he has reason to hope that, at a future period, he will be 
better off, he will always value a given quantity of immediately 
available goods at a higher figure than the same quantity of 
future goods. In economic life this occurs very frequently, 
and may be considered as typical in the two following cases. 
First, in all cases of immediate distress and necessity. A 
peasant who has had a bad harvest, or sustained loss by fire, 
an artisan who has had heavy expenses through illness or 
death in his family, a labourer who is starving; all these 
agree in valuing the present shilling, which lifts them out of 
direst need, ever so much more than the future shilling, — 
the proof being the usurious conditions to which such people 
often submit in order to raise money at the moment. 1 
Second, in the case of persons who have reason to look 
forward to economical circumstances of increasing comfort. 
Thus all kinds of beginners who have no means, such as young 
artists, lawyers, officials, budding doctors, men going into busi- 
ness, are only too ready, in return for a sum of present goods 

1 The proverb bis dat qui cito dat has therefore a quite sound economical 


which assists them to start in the vocation they have chosen, and 
acts as foundation of their economical existence, to promise a 
considerably larger sum on the condition that they do not 
require to pay it until they are in receipt of a decent income. 1 
Of course the contrary also occurs not unfrequently in 
economical life. There are persons who are comparatively 
well off at the moment, and who are likely to be worse off in 
the future. To this category belongs, among others, that very 
considerable number of people whose income is obtained, mostly 
or altogether, by personal exertions, and will, presumably, fall 
away at a later period of life when they become unfit for 
work. A merchant's clerk, for instance, who is in his fiftieth 
year, and has an income of £100, cannot expect to have any- 
thing better ten years later than, perhaps, a small retiring 
allowance of £30, or an annuity which he may secure by 
purchase at an assurance office. It is evident that to such 
people the marginal utility that depends on a shilling spent 
now is smaller than that depending on a shilling available 
in the more badly secured future. It would seem that, in 
such cases, a present shilling should be less valued than 
a future one. And so it would be if present goods were 
necessarily spent in the present, but that is not the case. 
Most goods, and among them, particularly, money, which 
represents all kinds of goods indifferently, are durable, and 
can, therefore, be reserved for the service of the future. The 
case, then, between present and future goods stands thus. 
The only possible uses of future goods are, naturally, future, 
while present goods have the same possibility of future use, 
and have besides — according to choice — either the present uses, 
or those future ones which may turn up in the time that 
intervenes between the present moment and the future point 
of time with which the comparison is being made. 

Here then are two possibilities. Either it is the case 
that all those uses of the present and near future, which are 
generally taken into consideration as regards the good in 

1 For this reason the well-known postponement of university fees in the 
case of poor students in Germany (Stundwng) is found to be a relief not much 
inferior to the total exemption of the same class in Austria (Befrriung). Or 
we may think of the conditions of the contract which the impresario makes 
with the singers he educates and brings out. 


question, are less important than the future uses ; and in this 
case the present good will be reserved for these future uses, 
will derive its value from them, 1 and will be just equal in 
value to a future good similarly available. Or it is the case 
that one of the earlier uses is more important ; and then the 
present good gets its value from this use, and has, therefore, 
the advantage over the future good, which can only obtain its 
value from a less important future employment. But, usually, 
one never knows that some unforeseen occurrence in the near 
future may not give rise to some more urgent want. At any 
rate such a thing is possible, and it gives a chance of profit- 
able employment to a good already on hand, such as, naturally, 
a good that will only come into our possession in the future has 
not got : — a chance which, as we have seen, is calculated in 
the amount of the value, and assessed, according to practical 
although incorrect methods, as an increment graduated according 
to its probability. To put it in figures. With £100 which 
will come into my hands at the end of five years, I can only 
aim at a marginal utility determined by the situation of things 
in the year 1896 ; we shall put this utility down at 1000 
ideal units. With £100 at my disposal now, I can, at the 
least, realise the same marginal utility of 1000 units, but if an 
urgent want, arising hi the meantime, gives me an opportunity 
of obtaining a marginal utility of 1200, 1 may, possibly, realise 
it. Say, now, that the probability of such an opportunity 
occurring equals one-tenth, I shall estimate the value of the 
present £100 at 1000 units certain and, beyond that, at one- 
tenth of the possible surplus of 200 : that is, in all, at 
1020 units. 2 Present goods are, therefore, in the worst case, 
equal in value to future goods, and, as a rule, they have the 
advantage over them in being employed as a reserve. The 
only exception occurs in those comparatively rare cases where 
it is difficult or impracticable to keep the present goods till 
the time of worse provision comes. This happens, for instance, 
in the case of goods subject to rapid deterioration or decay, 

1 According to the law laid down above on p. 162, for the case of alternative 
employments with different marginal utilities. 

2 I need scarcely say that, in practical life, we seldom or never make out our 
valuations with such minute exactitude as in the above illustration. But it 
does give a faithful picture of the kind of considerations of which we avail 
ourselves in such cases. 


such as ice, fruit, and the like. Any fruit merchant in harvest 
time will put a considerably higher value on a bushel of grapes 
to be delivered in April than on a bushel of grapes in his 
store at the time. Or say that a rich man is anticipating a 
long period of arrest, during which his living will be conformed 
to the hard fare of prison regime, how willingly would he give 
the price of a hundred present luxurious meals if he could 
ensure ten such meals during his captivity ! 

We may, then, draw up the balance-sheet which shows 
the influence of the different circumstances of Want and its 
Provision in present and future as follows. A great many *' 
persons who are not so well provided for in the present as 
they expect to be in the future, set a considerably higher value 
on present goods than on future. A great many persons who 2- 
are better provided for in the present than they expect to be 
in the future, but who have the chance of preserving present 
goods for the service of the future, and, moreover, of using 
them as a reserve fund for anything that may turn up in the 
meantime, value present goods either at the same figure as 
future, or a little higher. It is only in a fractional minority . 
of cases, where communication between present and future is 
hindered or threatened by peculiar circumstances, that present 
goods have, for their owners, a lower subjective use value 
than future. This being the state of things, even if there was 
nothing else co-operating with this difference of want and 
provision in present and future, the resultant of the subjective 
valuations, which determines the objective exchange value, 
would obviously be such that present goods must maintain a 
proportionate advantage, a proportionate agio over future. 
But, besides this, there are other co-operating circumstances 
which work, even more distinctly, in the same direction. 



It is one of the most pregnant facts of experience that we attach 
a less importance to future pleasures and pains simply because 
they are future, and in the measure that they are future. Thus 
it is that, to goods which are destined to meet the wants of the 
future, we ascribe a value which is really less than the true in- 
tensity of their future marginal utility. We systematically under- 
estimate future wants, and the goods which are to satisfy them. 
Of the fact itself there can be no doubt ; but, of course, in 
particular nations, at various stages of life, in different in- 
dividuals, the phenomenon makes its appearance in very vary- 
ing degree. We find it most frankly expressed in children 
and savages. With them the slightest enjoyment, if only it 
can be seized at the moment, outweighs the greatest and most 
lasting advantage. How many an Indian tribe, with careless 
greed, has sold the land of its fathers, the source of its main- 
tenance, to the pale faces for a couple of casks of " firewater " ! 
Unfortunately very much the same may be seen in our own 
highly civilised countries. The working man who drinks on 
Sunday the week's wage he gets on Saturday, and starves along 
with wife and child the next six days, is not far removed from 
the Indian. But, to a smaller extent, and in more refined 
form, the same phenomenon is, I venture to assert, not quite 
unknown to any of us, however prudent, or cultured, or highly 
principled. Which of us has not been surprised to find that, 
under the pressure of momentary appetite, he was not able to 
refuse some favourite dish or cigar which the doctor had 
forbidden — knowing perfectly that he was doing an injury 
to his health, which, calm consideration would tell him, was 


much more considerable than the pleasure of that trifling 
indulgence ? Or, which of us has not, to avoid a little 
momentary embarrassment or annoyance, plunged headlong into 
a much greater ? Who is there that has never postponed some 
troublesome but unavoidable call, or business, or work which 
had to be done within a certain time, till the day was past 
when it could be done with little trouble, and has had to do it 
in more difficult circumstances, in haste and hurry, with over- 
exertion and ill-humour, to the displeasure of those who were 
injured or wounded by the delay ? Any one who knows himself, 
and keeps his eyes open to what is going on around him, will 
find this fact of the underestimate of future pleasures and 
pains exhibited under a thousand forms in the midst of our 
civilised society. 

Of the fact, then, there is no doubt. Why it should be so 
is more difficult to say. The entire psychological relations, 
indeed, through which future feelings in general act on our 
judgments and our actions, are still very obscure, and it will 
be understood that the same obscurity covers the reasons why 
future feelings act with greater weakness on our judgments 
and actions than present feelings. Without meaning to fore- 
stall the pronouncement of the psychologists, who seem to me 
more competent to decide on both questions than the economists, 
I venture to think that this phenomenon rests, not on one ground, 
but on the joint action of no less than three different grounds. 

The first ground seems to me to be the incompleteness of 
the imaginations we form to ourselves of our future wants. 
Whether it be that our power of representation and abstraction 
is not strong enough, or whether it be that we will not take 
the necessary trouble, the consideration we give our future and, 
particularly, our far-away future wants, is more or less im- 
perfect. Naturally, then, all those wants which we have not 
considered remain without influence on the valuation of such 
goods as are destined to serve those future wants, and, conse- 
quently, the marginal utility of such goods is put too low. 

While this first ground is very much a peculiar defect in 
estimate, the second seems to me to rest on a defect in 
will. I believe it frequently occurs that a man, called on to 
make choice between a present and a future pleasure or pain, 
decides for the present pleasure although he knows perfectly, 


and is even conscious while choosing, that his future loss will 
outweigh his present gain, and that, taking his welfare as a 
whole, the choice is unprofitable. How well many a " good 
fellow " knows the painful embarrassments and privations he is 
bringing on himself, by running through his salary on the day 
he gets it, and yet has not the strength to resist the temptation 
of the moment ! Or, how often does a man, " from weakness," 
let himself be hurried into taking some step, or making some 
promise, which he knows at the moment he will rue before 
twenty -four hours are over ! The cause of such defects in 
conduct, I say, appears to me, in distinction from the former 
case, to rest, not on want of knowledge, hut on defect of will. 
I should not be surprised, however, if the psychologists were 
to explain this case also as only a variation of the former : it 
may be that the weaker feeling of the moment prevails over 
the stronger feeling of the future only because the latter, while 
present in consciousness in a general way, is not lively enough 
and strong enough to take possession of the mind. For our 
purpose, however, it is a matter of no consequence. 

Finally, as third ground, I am inclined to name the consider- 
ation of the shortness and uncertainty of life. In the case 
of future goods, their objective acquisition may be practically 
certain, 1 and yet it is possible that we may not live to acquire 
them. This makes their utility a matter of uncertainty for us, 
and causes us— in perfect analogy with the case of objectively 
uncertain goods — to make a deduction from their value corre- 
sponding to the degree of uncertainty. 2 A utility of 100, as 
to which there is 50% of probability that we shall not live to 
see it, we certainly do not value so highly as a present utility 
of 100; probably we value it as we do a present utility of 5 ; 
and I am convinced that any of us who was promised, to-day, 
a cheque for £10,000 on his hundredth birthday, would be 
glad to exchange this large, but somewhat uncertain gift, for a 
very small sum in present money ! To determine correctly the 
practical influence of this factor, however, we must make a 

1 See above, p. 245. 

- If there is objective uncertainty as well as subjective there will, naturally, 
be two deductions. Of these the one made on account of objective uncertainty, 
as a particular phenomenon of certain kinds of goods, has nothing to do with 
interest ; we have only to deal with the deduction on account of subjective 


somewhat more accurate calculation, both of the extent to 
which it prevails, and the way in which it works. 

As regards this I think we shall be able to establish what 
follows. The factor in question is directly active only in a 
minority of cases : in most cases its action is indirect. It 
works in the most direct and powerful way in those not very 
numerous cases where men have the thought of death forced 
on them by peculiar circumstances ; for example, among very 
old men, people suffering from fatal diseases, those placed in 
dangerous situations or engaged in very perilous callings, such as 
people in times of plague or soldiers before an engagement, and 
so on. The disregard of a future so uncertain not seldom finds 
drastic expression in the mad extravagance which seizes people 
in such circumstances ; a fact in the history of civilisation 
which has often been noted — by Adam Smith among others. 
On the other hand, the thought of the uncertainty of life seems 
to me to exert no direct influence at all in that vast majority 
of cases where we are dealing with men in normal circum- 
stances, and dealing, at the same time, with the valuation of 
goods belonging to a time not very far in the future ; say, 
goods that would come into their possession in a couple of days, 
or months, or even years. I am convinced that a healthy 
middle-aged man, to whom a payment of £100 next year was 
due for certain, would not value it a single penny less on the 
ground that he might not live to see next year. It is only 
where very long periods of time are concerned that this factor, 
among normally situated men, obtains fully and directly. 
Payments which fall due in a hundred, fifty, or even twenty 
years, lose in value from the consideration of the uncertainty 
of life as regards all payees : payments which fall due in ten 
years lose in value as regards a great many. 

And here finally we have the point from which this third 
motive may rise to universal indirect efficiency — although, at 
the same time, a very much weakened efficiency. If certain differ- 
ences of valuation have once become established as regards long 
intervals of time, they must, through the agency of exchange 
transactions, to some degree affect shorter intervals. For the 
mechanism which determines objective value abhors any sudden 
leap in value. It is not possible, for example, that a payment 
of £100 which will be made on 1st January 1900 certain, 

chap, in ARBITRAGE 257 

should be worth only £80 till 31st December 1889, and 
should jump up to the full value of £100 at twelve o'clock 
that night, because the due date is now only ten years off. 
Equalising tendencies, and transactions which I can best com- 
pare with stock exchange arbitrage, spread the differences of 
value, which obtain as regards long periods, uniformly over the 
entire intermediate period. — Putting all these peculiar circum- 
stances together, I should be inclined to consider the practical 
efficiency of this factor not altogether trifling. Still I should 
not place it very high, especially as it is weakened, to a not 
inconsiderable extent, by the consideration of closely related 
heirs. In any case, the two motives first mentioned have con- 
siderably more to do with the undervaluation of the future 
utility than the third. 1 All three causes of our underestimate 
of future utility — errors of valuation through faulty represent- 
ation of coming needs, defects of will, and consideration of 
the uncertainty of life — manifest themselves in extremely 
different degrees in different individuals, and even in the same 
individual at different times, according to differences of temper- 
ament and mood. For the same interval of time they may 
cause one to make an undervaluation of 100%, another of 
50%, a third of 1% or 2%: while they may send fanatics 
in the matter of foresight and precaution to the opposite 
extreme of overvaluing future utility. I should like to call 
special attention, further, to the fact, that the undervaluation 
which results from these causes is not at all graduated har- 
moniously, in the subjective valuation of the individuals, 
according to the length of the time that intervenes. I mean, 
it is not graduated in this way, for example, that the man who 
discounts a utility which he expects to get in one year by 
5%, must discount a utility due in two years by 10%, or one 
due in three months by lg;%. On the contrary, the original 
subjective undervaluations are, in the highest degree, unequal 
and irregular. In particular, so far as the undervaluation is 
caused by defects of will, there may be a strong difference 
between an enjoyment which offers itself at the very moment, 
and one which does not ; while, on the other hand, there may be 

1 An effect analogous to that of the uncertainty of life might be exerted by 
the uncertainty of the duration of our capacity of enjoyment ; but in any case 
the limits of the efficiency of this motive are much mor closely drawn. 



a very small difference, or no difference at all, between an 
enjoyment which is pretty far away, and one which is farther 
away. Uniformity is practically introduced into the various 
undervaluations, as we shall see later, only through the media- 
tion of exchange business. At any rate — and this is sufficient 
for us here — all three causes have one common result ; that, 
under their influence, we estimate the utility of future goods 
at a lower figure than expresses their true value : we look at 
the marginal utility of future goods diminished, as it were, in 
perspective. 1 

Now it is easy to show that this phenomenon must sub- 
stantially contribute to strengthen the efficiency of the first 
factor in the undervaluation of future goods, the difference in 
the provision of goods for present and future. All persons who 
are worse off in the present than they expect to be in the future, 
— persons to whom, therefore, the true marginal utility of a 
future good is already less than the marginal utility of a similar 
present good, — are led by this second factor to put the future 
marginal utility still lower than it really is, and this increases 
the difference in value to the further prejudice of future goods. 
If. for example, the marginal utility of a definite present good 
is 100, and the true marginal utility of a similar good 
in a better -provided future is 80, the future good will be 
rated, perhaps, at 70 only, thanks to this second factor, and 
thus the difference of valuation rises from 20 to 30. In the 
same way those persons who may be supposed to be in 
approximately similar circumstances in present and future, and 
would, other things being equal, value present and future goods 
at approximately the same figure, will fall under the category 
of those who value present goods more highly than future. 
This second factor, then, increases both the number and the 

1 Jevons, like his follower Sax, as we saw in the note to p. 239, fell into a 
misunderstanding as to the entire nature of the phenomenon mentioned in the 
text, in confusing the representations and valuations which we make as regards 
future feelings with actually present feelings. We need not wonder, then, at 
not finding in these writers any sound thorough -going explanation of the 
phenomena, or even an attempt at such. They accept the supposed "weakened 
anticipated feelings" of future needs simply as fact, as a "well-known psycho- 
logical fact," and they pass over much of its detail — which really very much 
requires explanation — without comment as "self-evident" (see, e.g., Sax as 
before, p. 178). 


intensity of the differences in valuation to the prejudice of 
future goods, and, naturally, in the market where present goods 
are exchanged against future, this must make the resultant 
exchange value more unfavourable to the latter. The agio on 
present goods moves upwards. 1 

1 Indirectly this effect will be strengthened by the fact that, through the under- 
valuation of the future utility, men will refrain from providing for the future so 
amply as they would otherwise have done. In other words, this underestimate 
acts to the prejudice of saving and accumulation of wealth, and still further 
reduces the number of persons who have to throw an accumulated surplus of 
present goods on the market. 



There is still a third reason why present goods are, as a rule, 
worth more than future. The fact on which it is based has 
long been known in a general way, but its essential nature 
has been thoroughly misunderstood. Hidden in a perfect 
wilderness of mistakes, economists ever since Say and Lauder- 
dale have been in the habit of going to it, under the name 
"productivity of capital," for their explanation and justifica- 
tionoF Interest. 1 This name, which has already been the 
cause of so many errors, and which, besides, does not altogether 
correspond with what it is intended to convey, I shall lay on 
one side, and shall confine myself to the facts of the case pure 
and simple. These facts are as follows : — that, as a rule, 
present goods are, on technical grounds, preferable instruments 
for the satisfaction of human want, and assure us, therefore, a 
higher marginal utility than future goods. 

It is an elementary fact of experience that methods of 
production which take time are more productive. That is to 
say, given the same quantity of productive instruments, the 
lengthier the productive method employed the greater the 
quantity of products that can be obtained. In previous 
chapters we went very thoroughly into this, showed the reasons 
of it, and illustrated and confirmed it by many examples. 2 I 
venture to think we may now assume it as proved- If, 
then, we take an amount of productive instruments avail- 
able at a certain point of time as given, we have to repre- 
sent the product, which may be turned out by increasingly 
lengthy processes, under the picture of a series increasing in a 

1 See Capital and Interest, p. 111. 2 See above, pp. 18, 84. 


certain ratio, regular or irregular. Suppose that, in the year 
1888, we have command of a definite quantity of productive 
instruments, say, thirty days of labour, we may, in terms of the 
above proposition, assume something like the following. The 
month's labour, employed in methods that give a return 
immediately, and are, therefore, very unremunerative, will 
yield only 100 units of product: employed in a one year's 
process, it yields 200 units, 1 but, of course, yields them only 
for the year 1889: employed in a two years' process it yields 
280 units — for the year 1890 — and so on in increasing pro- 
gression ; say, 350 units for 1891, 400 for 1892, 440 for 
1893, 470 for 1894, and 500 for 1895. 

Compare with this what we may get from a similar 
quantity of productive instruments, namely, a month's labour, 
under the condition that we do not get possession of the 
labour till a year later. A month's labour which falls due in 
the year 1889 evidently yields nothing for the economic year 
1888. If any result is to be got from it in the year 1889 it 
can only be by employing it in the most unremunerative 
(because immediate) production, and that result will be, as 
above, 100 units. In 1890 it is possible to have a return of 
200 units by employing it in a one year's method of produc- 
tion ; in 1891 to have 280 units by employing it in a two 
years' process, and so on. In exactly the same way, with 
a month's labour falling due two years later, in 1890, nothing 
can be had to satisfy the wants of the economic years 1888 
and 1889, while 100 units may be got for 1890 by an 
unremunerative immediate process, 200 for 1891, 280 for 
1892, and so on. If we group together in one table the 
result obtainable for the satisfaction of our wants from a 
similar amount of present, next year's, and succeeding years' 
productive instruments, we get the following scheme : — 

1 Naturally, in the case of lengthier processes, the labour first expended requires 
that the production should be continued by the addition of new labour. By the 
figures given in the text is always meant that share in the product which, of the 
total product, falls to the productive unit — in this case the thirty days' labour. 
If, e.g., in the case of a one year's process, other eleven months of labour follow 
the one first expended, this would involve, in terms of our illustration, that a 
total product of 2400 units was obtained in the twelve months taken together, 
and thus, to the one month, would be ascribed a product of 200 units. 


BK. V 






» < 














■ - 




































Putting these figures into words, the table shows that, what- 
ever economic period we may fix upon, our economic interests 
for that period are more advanced by a month's labour of 1888 
than by a month's labour of 1889, by one of 1889 than by 
one of 1890, and so on. To meet the wants of 1888, for 
example, a month's labour expended in the year 1889 or 1890 
gives us nothing, while a month's labour expended in 1888 
places at our command at least 100 units of product. To 
meet the wants of 1893 a month of 1890 gives us 3 5 units, a 
month of 1889 400 units, a month of 1888 440 units. What- 
ever period of time we take as our standpoint of comparison, 
the earlier (present) amount of productive instruments is seen 
to be superior, technically, to the equally great later (future) 
amount. 1 

1 On the same analogy, as a present month of labour is technically superior to 
a future, so is a past month to a present. According to our scheme a month of 
the period 1883, e.g., would give for 1888, in a 5 years' process, 440 units, while 
a month of the year 1888 would give only 100 units. But, naturally, the past 
years would realise their technical superiority, as against the present, only under 
the condition that they also were actually invested in correspondingly lengthy 
and roundabout processes. But this is seldom the case as regards long past 
years. And, therefore, one need not be frightened at the consequences which, 
of course, the above theory involves ; that, for instance, a month's labour of 
the fifteenth century is, perhaps, a hundred times, and a month's labour of the 
year of our Lord, perhaps, a thousand times more fruitful than a month's labour 
of the present year ; that, accordingly, to a certain extent, the productive 
powers of the past were gigantic beside those of to-day, and to-day's pro- 
ductive powers gigantic compared to those of future centuries — a view which 
would seem to give us but a dreary outlook to a continuous degeneracy of 
our productive powers. Certainly, if any one in the year 1 had expended 
a month of labour with a view to the marginal utility of the year 1888, 


But is it superior also in the height of its marginal utility 
and value ? Certainly it is. For if, in every conceivable 
department of wants for the supply of which we may or shall 
employ it, it puts more means of satisfaction at our disposal, 
it must have a greater importance for our wellbeing. Of 
course I am aware that the greater amount need not always 
have the greater value ; — a bushel of corn in a year of famine 
may be worth more than two bushels after a rich harvest ; a 
silver shilling before the discovery of America was worth more 
than five shillings are now. But for one and the same person. 
at one and the same point of time, the greater amount has 
always the greater value ; whatever may be the absolute 
value of the bushel or the shilling, this much is certain, that, 
for me, two shillings or two bushels which I have to-day are 
worth more than one shilling or one bushel which I have 
to-day. And in our comparison of the value of a present 
and a future amount of productive instruments the case 
is exactly similar. Possibly the 470 units of product 
which may be made from a month's labour in 1889 for the 
year 1895, are worth less than the 350 units which may be 
got from the same for the year 1892, and the latter, notwith- 
standing their numbers, may be the most valuable product 
which can be made out of a month of 1889 in general. In 
any case the 400 units which a man can gain by a month's 
labour of the year 1888 for the year 1892 are still more 
valuable, and therefore the superiority of the earlier (present) 

and had arranged for the systematic continuation of the work during all the 1888 
years intervening, in that case, thanks to the natural powers impressed into the 
service in the course of such a roundabout journey, the product of that long past 
month would be mountains high beside the product of a month of the present 
year. But, as things are, trees do not grow up till they meet the sky. The 
productive powers are too necessary for the wants of the living, to let us employ 
them in advance for the behoof of future centuries or future thousands of } r ears. 
And thus the year of those future wants to which we look forward and work, 
and by which we get the measure of the productiveness of the powers, moves 
forward very much parallel with the year when the productive powers are exerted. 
It is quite certain that our productive powers of 18SS do for the wants, say, of 
the year 1898, as much as and more than the productive powers of the year 
1 a.d. did for the wants of the year 11 a.d. And thus the productive powers of 
giants do not degenerate into those of pigmies, as a sophistical dialectic might 
easily delude us into believing: in all ages, the productive powers, according to 
the advance of technique, do as much or, rather, increasingly more for the wants 
of their own circle of provision. 


amount of productive instruments — here and everywhere, 
however the illustration may be varied — remains confirmed. 

The truth of the proposition, that the technical superiority 
of present to future means of production must also be associated 
with a superiority in value, may be made absolutely convincing 
by mathematical evidence if the tabular comparison, which we 
have drawn out to show the technical productiveness of 
different years of productive instruments, be extended to the 
marginal utility and value of the same. And since we have 
to deal here with a proposition which will form the chief pillar 
in my interest theory, I prefer to err on the side of making it 
too plain rather than risk not making it plain enough, and I 
shall spare no pains to prove it in the most complete way. 
In other respects, too, the trouble it costs us will not be 
altogether lost : as we proceed we shall get an occasional 
glimpse into certain relations which are seldom or never taken 
thought of, and yet, none the less, have some importance 
towards giving us a complete and thorough grasp of the whole. 

The marginal utility and value of means of production 
depend, as we know, 1 on the anticipated marginal utility and 
value of their product. But the means of production of which 
we have been speaking, the month's labour, may be invested in a 
production that yields an immediate return, or in a one, two, 
three, or ten years' period of production, and, according as it 
is so invested, we may obtain the very different product of 
100, 200, 280, 350 units, and so on. Which of these 
products is to be our standard ? The foregoing chapters have 
already given us the answer. In the case of goods which may 
be employed in different ways yielding different marginal 
utilities, it is the highest marginal utility that is the standard. 
Therefore, in our present case, it is that product which pro- 
duces the greatest amount of value. 2 But this need not 

1 See above, p. 179. 

2 See above, p. 163. To prevent a mistake which is very apt to arise 
chrough the similarity of the words, I again emphasise here that the proposi- 
tion in the text is not in contradiction with the fundamental proposition on 
p. 186, that, for productive goods, the value of the least valuable of their 
products, the value of the "marginal product," is the standard. The marginal 
product, that is to say, is the last of several products which may all be made 
from the available means of production ; but, in the case we are now considering, 


coincide with the largest product, the product which contains 
the greatest number of units ; on the contrary, it seldom or 
never coincides with that. We should obtain the greatest 
number of units by an infinitely long production process, or a 
process lasting a hundred or two hundred years. But goods 
which first come into possession in the lifetime of our grand- 
children or great-grandchildren, have, in our valuation of to-day, 
little or no value. 

In determining which, of various possible products, has the 
highest value for us, we are guided by the two considerations 
of which we have just spoken. First, we are guided by the 
anticipated position of our provision at the various periods of 
time. If, for instance, a man is ill provided for in the present, 
or not provided for at all, the unit of product in the present 
may, on that very account, have so high a marginal utility and 
value, that the sum of value of 1 present units of product is 
greater to him than that of 500 units which he might have at 
his command in 1895. To another man, again, whose present 
is as well provided for, or nearly as well provided for, as his 
future, the advantage in numbers may give an advantage in 
value to the 500 units. The second consideration by which 
we are guided is, that our present valuation of a future good 
or product does not depend on its true marginal utility, but 
on our subjective estimation of the marginal utility. But, in 
forming this subjective estimate, there takes place, as we have 
already seen, a kind of perspective diminution ; a diminution 
which is in direct ratio with the futurity of the time to which 
the good in question belongs. The amount of which we are 
in search, therefore, the greatest sum of value, will evidently 
belong to that one, among the various possible products, the 
number of whose items, multiplied by the value of the unit of 
product (as that value shows itself with regard to the relation 
of want and provision for want in the particular economic period, 
and with regard to the diminution which future goods undergo 
from perspective), gives the greatest amount of value. 

We shall put our illustration in figures chosen at random. 
I wish to emphasise that the figures can be chosen quite at 

it is not a matter of employing a month's labour in one and more years' pro- 
duction, but in one or more years' production. And of these alternative employ- 
ments, naturally, the most important has the preference. 


random and varied by the reader at will, for our proposition 
maintains its validity in every conceivable position of subjective 
valuations. Moreover I intentionally take figures varying 
very greatly and irregularly, it being obvious enough, without 
any special demonstration, that, if the value of the unit of 
goods were not to vary for the different periods, or not to vary 
much, the present means of production, as giving a greater 
quantity of products, would inevitably give us also a greater 
sum of value. Assume, then, quite at random, that, for a 
certain individual, the true marginal utility and value of the 
unit of product — taking into account his special circumstances 
of provision, which we shall suppose are, on the whole, gradu- 
ally improving — are as follows: in 1888, 5 units, of value 
(pounds, shillings, or units of any ideal standard); in 1889, 4 ; 
in 1890, 3-3 ; in 1891, 25 ; in 1892, 2*2 ; in 1893, 21 ; in 
1894, 2 ; and in 1895, 1 "5. This true marginal utility, then, 
by reason of perspective, experiences, for the later periods, 
an irregularly progressive reduction of this kind: for 1888 
it is, subjectively estimated, 5 (without reduction) ; for 1889, 
instead of 4, it is 3*8 ; for 1890, instead of 3*3, it is only 3 ; 
for 1891, 2-2; for 1892, 2; for 1893, 1-8; for 1894, 1*5; 
and for 1895, 1. If, now, on the basis of these figures, we 
calculate the sums of value represented by the different possible 
products of a month's labour falling due in the various years, 
from 1888 to 1891, we get the following tables: — 


For the Economic 

Units of 

True Marginal 
Utility of Unit. 

Utility reduced 
in Perspective. 

Amount of 

Value of Entire 














































For Economic 


True Marginal 

Reduced Mar- 



ginal Utility. 









































For Economic 


True Marginal 

Reduced Mar- 
ginal Utility. 









































For Economic 


True Marginal 

Reduced Mar- 
ginal Utility. 


1888 . 




■ — 



































The conclusion we draw from these tables is the follow- 
ing. The highest value of product obtainable by the month's 
labour available in 1888 — that which determines its own 
valuation — is 840 : the highest value obtainable by a month's 
labour available in 1889 is only 720 : while the highest value 
obtainable by a month's labour available in 1890 and 1891 
is 630 and 525 respectively. As a fact, therefore the present 
month's labour is superior to all future ones, not only in 
technical productiveness, but also in marginal utility and value. 

I repeat emphatically that this result is not an accidental 
one, such as might have made its appearance in consequence 
of the particular figures used in our hypothesis. On the single 
assumption that longer methods of production lead generally 
to a greater product, it is a necessary result ; a result which 
must have occurred, in an exactly similar way, whatever might 
have been the figures of quantity of product and value of unit 
in the different years. 

I must, further, lay particular weight on the fact, that this 
result does not make its appearance simply because, in our 
hypothesis, we have introduced, as already active, those other 
two circumstances which are fitted to account for a surplus 
value of present as against future goods — namely, a difference 
in the circumstances of provision at the various periods of 
time, and a diminution of the future utility by way of perspec- 
tive. The superiority in value of present means of production, 
which is based on their technical superiority, is not one 
borrowed from these circumstances ; it would emerge of its 
own strength even if these were not active at all. I have 
introduced the two circumstances into the hypothesis only to 
make it a little more true to life, or, rather, to keep it from 
being quite absurd. Take, for instance, the influence of the 
reduction due to perspective entirely out of the illustration, 
and we get the following figures : — 













i— i 














































We see that now the absolute figures of the sums of value 
are increased throughout, and also that the economic centre 
of gravity is transferred to another year j 1 but the thing which 
concerns us is that the result remains unchanged; — the 
month's labour of 1888 shows the highest figure of value, and 
all the others a decreasingly smaller one. 

But if we were also to abstract the difference in the 
circumstances of provision in different periods of time, the 
situation would receive the stamp of extreme improbability, 
even of self-contradiction. If the value of the unit of product 
were to be the same in all periods of time, however remote, 
the most abundant product would, naturally, at the same 
time be the most valuable. But since the most abundant 
product is obtained by the most lengthy and roundabout 
methods of production, — perhaps extending over decades of 
years, — the economic centre of gravity, for all present means 
of production, would, on this assumption, be found at ex- 
tremely remote periods of time 2 — which is entirely contrary 
to all experience. And, besides, if such a state of things were 
to emerge at any particular point of time, it would immedi- 
ately bring its own correction. For if every employment of 

1 e.g. the economic centre of gravity for the month's labour of 1888 in the 
former case lay in the product attainable for the year 1890 ; it now lies in that 
attainable for 1894. 

2 But here, all the same, the month's labour of 1888 remains superior to that 
of 1889. For, as regards any one remote period, say; the year 1988, the former, 
as employed in a process longer by one year, could produce a somewhat greater 
product than the latter. 


goods for future periods is, not only technically, but economic- 
ally, more remunerative than the employment of them for the 
present or near future, of course men would withdraw their 
stocks of goods, to a great extent, from the service of the 
present, and direct them to the more remunerative service of 
the future. But this would immediately cause an ebb-tide in 
the provision for the present, and a flood in the provision for 
the future, for the future would then have the double advan- 
tage of having a greater amount of productive instruments 
directed to its service, and those instruments employed in 
more fruitful methods of production. Thus the difference in 
the circumstances of provision, which might have disappeared 
for the moment, would recur of its own accord. 

But it is just at this point that we get the best proof that 
the superiority in question is independent of differences in the 
circumstances of provision : so far from being obliged to borrow 
its strength and activity from any such difference, it is, on 
the contrary, able, if need be, to call forth this very difference. — 
Thus we get, as result of our digression, the assured conviction 
of two things ; — first, that the productive superiority of pre- 
sent goods assures them, not only a surplus in product, but 
a surplus in value, and, second, that, in this superiority, 
we have to deal with a third cause of the surplus value, and 
one which is independent of any of the two already mentioned. 1 

We have now to ask : To what extent is this third cause 
active ? Of this our former analyses give a poor and inade- 
quate picture. What has been said is only sufficient to 
explain how present Means of Production are worth more than 
future means of production. But, from the same cause, as we 
have now to show, present consumption goods also obtain a 

1 Those who prefer somewhat more venturous generalisations might, perhaps, 
be inclined to put the first and the third cause together under one common 
category, that of the "technical superiority " of present goods. For the prefer- 
ence given to present goods in virtue of the different relations of provision 
also rests peculiarly on a technical circumstance ; namely, that they allow of a 
greater choice of employments, both as regards present and future wants, while 
future goods, naturally, are adapted to serve future wants only. At all events, 
this technical superiority is so essentially distinct from the other of the greater 
technical pruduclinty, that the two elements would require again to be kept 
separate from each other. It appears to me, therefore, in the interests of clear- 
ness that they should be kept entirely distinct from the first. 


preference over future consumption goods, so that, in this 
third cause, we have a quite universally valid reason for present 
goods having a greater value than future. 

The connection is as follows. Command over a sum of 
present consumption goods provides us with the means of 
subsistence during the current economic period. This leaves 
the means of production, which we may have at our disposal 
during this period (Labour, Uses of Land, Capital), free for the 
technically more productive service of the future, and gives us 
the more abundant product attainable by them in longer 
methods of production. On the other hand, command over a 
sum of future consumption goods leaves, of course, the present 
unprovided for, and, consequently, leaves us under the necessity 
of directing the means of production that are at our command 
in the present, wholly or partially, to the service of the present. 
But this involves curtailment of the production process, and, 
as consequence, a diminished product. The difference of the 
two products is the advantage connected with the possession 
of present consumption goods. 

To illustrate this by an example as simple as it is well- 
worn. Imagine, with lioscher, 1 a tribe of fisher-folk without 
capital, subsisting on fish left in pools on the shore by the 
ebb-tide and caught with the bare hand. Here a labourer may 
catch and eat three fish a day. If he had a boat and net he 
could catch thirty fish a day, instead of three. But he cannot 
have these tools, for their making would cost him a month's 
time and labour, and, in the meantime, he would have nothing 
to live upon. To save himself from starvation he must con- 
tinue his wretched and costly fishiug by hand. But now some 
one cleverer than the rest borrows ninety fish, promising, 
against the loan, to give back a hundred and eighty fish after 
one month. With the borrowed fish he supports himself 
during a month, makes a boat and net, and, during the uext 
month, catches nine hundred fish instead of ninety. From this 
take, not only can he make the stipulated payment of a hundred 
and eighty fish, but he retains a considerable net gain to 
himself, and thereby affords a striking proof that the ninety 
(present) fish he borrowed were worth to him, not only much 
more than the ninety, but even more than the hundred and 
eighty (future) fish he paid for them. 

1 Grundlagen, § 189. 


1STow, of course, the differences in value are not always so 
great as in this example. They are greatest among people 
who live from hand to mouth. For them to get command 
over present consumption goods means the transition to 
capitalist production. Less striking, but always present, is the 
difference where people already possess a certain stock of goods. 
If, for example, their stock of goods is sufficient for three years, 
they may realise their means of production in an average three 
years' production process. If, now, by some means or other, 
they obtain another year's supply of present means of sub- 
sistence, they may extend their average production period from 
three to four years, and obtain thereby an increment of product 
which, absolutely, is always important, but, relatively, will be 
much less than in the first case. 

We can see that here, again, the matter of fact, on which I 
base my conclusions, is an old and well-known one : even in 
the time of Adam Smith and Turgot, it was notorious that 
the possession of present consumption goods confers certain 
advantages. But as the older theory of capital was, generally 
speaking, a nest of warped conceptions and incorrect explana- 
tions, this fact also was put down in a form as singular as it 
was inappropriate. Consumption goods — goods for immediate 
consumption — were looked on as productive goods or means of 
production ; as such they were counted capital ; and then all 
the advantages inherent in them were explained by the pro- 
ductivity of capital. Indeed, a writer of the standing of Jevons, 
simply through dwelling on the great importance which attaches 
to the command over present goods, was misled into ascribing 
to consumption goods the high position of being the only 
capital ! In face of such misinterpretations our business now 
is to get at the truth of facts. And the facts are very simple. 
Consumption goods are not means of production : they are, 
therefore, not capital ; and the advantages which they confer 
do not proceed from any productive power they possess. 
Everything turns on the simple fact that, according to the 
quite familiar laws of value, present goods, in virtue of the 
above stated casuistical connection of circumstances, are, norm- 
ally, the means of obtaining a higher marginal utility, and 
receive thereby a higher value, than future goods. 



To put together the results at which we have arrived thus far. 
We have seen that there are three factors, each of which, in- 
dependently of the other, is adequate to account for a difference 
in value between present and future goods in favour of the 
former. These' three factors are : The difference in the 
circumstances of provision between present and future; the 
underestimate, due to perspective, of future advantages and 
future goods ; and, finally, the greater fruitfulness of lengthy 
methods of production. The question now is : — how do these 
factors, working simultaneously, affect each other ? 

About the two first factors we know already : their effects 
are cumulative. In the case of a man badly provided for in 
the present, if the marginal utility of a present good were 100, 
and its true marginal utility in a future period only 80, the 
present good would be valued, relatively to the future, in the 
ratio of 100 to 80, if no other influence intervened. But if 
there is, besides, a perspective diminution of the true future 
marginal utility, say by one-eighth, the marginal utility would 
be put at 70 instead of 80, and the superiority of the present 
good to the future would be in the ratio of 100 to 70. 

It is essentially different with the co-operation of the third 
factor. True, it also tends to strengthen the action of the 
other factors, but it does so alternatively, not cumulatively ; 
that is to say, that factor which confers the greater advantage 
on present goods always stands out from the other as the 
active agent. Say, for example, that the first factor (the cir- 
cumstances of provision), together with the second factor (that 
of perspective), taken cumulatively, would give present goods 


an advantage of 30%, while the factor of productivity would 
give an advantage of 25%, we should not get a total advantage 
of 55%, but of 30%, the advantage being based on the stronger 

The matter stands thus. The superiority of present goods, 
as making roundabout and more fruitful ways of production 
possible, cannot be increased by the perspective undervaluation 
of future goods, because the utility got from lengthy processes 
is itself a future utility, to which the perspective undervaluation 
applies as much as it applies to the future goods with which 
the present goods are compared. Say that, by employing a 
month's labour now, in 1888, in a one year's process, I can 
make, for 1889, a product of 200 units, and, by employing a 
month's labour of 1889, I can make for that same year — on 
account of the short and unproductive method — a product of 
100 units only, it will be a reason for my valuing the present 
month of labour at double the next year's month. If, now, 
there comes in a ten per cent undervaluation of next year's 
utility, I shall, of course, value the next year's 1C0 units 
at 9 present units only ; but, for exactly the same reason, I 
shall value the 200 units at 180 present units only ; and the 
ratio of valuation, two to one, remains exactly as if the perspec- 
tive undervaluation had never come into play at all. 

As little can the third factor be strengthened by the first 
factor, namely, the consideration of a greater present want. 
For, evidently, employing a good to a great future productive 
utility, and employing it to satisfy an immediate pressing want, 
are mutually exclusive employments ; and it is clear that a 
good, which can only be employed in the one way or the other, 
cannot obtain a cumulative advantage from the two together. 

But these two factors do work into each other's hands in 
the following way. Present goods may be used to meet present 
wants, or they may be invested in production for the future. 
These are the two possible employments to which each indi- 
vidual may put his present goods. According to principles 
with which we are familiar, the stock of goods will be guided 
into these employments in such a way, that the most important 
chances of using the goods are utilised first, the next important 
second, and so on down the scale. Here, however, it is to be 
noted that the employments in producing for the future, as 


standing over against the employments in the satisfaction of 
immediate wants, must submit to the perspective diminution 
with which we are familiar. Say, for instance, that a man's 
particular circumstances are such that he estimates a utility, 
falling due in the following year, at 10% less than an equally 
great present utility ; then a future utility of 110 becomes 
equal to a present utility of 100, and, on that account, when 
there comes to be a choice between employments, the future 
utility of 110 may be postponed to a present utility of 102. 
The last employment, then, which, on these principles, is still 
supplied from the stock of goods, indicates, as we know, the 
marginal utility, and, at the same time, the value of the unit 
of goods. 

Now the following cases may occur. First, the individual 
may be badly off in the present. In that case the pressing 
wants of the moment will, by themselves, absorb the small 
stock of present goods, and, on the ground of this bad provision- 
in the present, these goods will obtain a high value and a prefer- 
ence over future goods. The needy man prefers present goods 
because he must consume them in the present. The opportuni- 
ties of employing the goods for productive purposes in the 
future remain in this case — since the poverty-stricken present, 
naturally, cannot afford any goods for purposes beyond itself — 
out of court as economically impossible, and, of course, without 
any influence on the value, or preferable value, of present goods. 

Or, second, the individual may be equally well provided as 
regards both present and future, but may have less forethought. 
This case leads to a similar result. Before, it was urgent want 
that prevented portions of the stock of goods from being with- 
drawn from the service and enjoyment of the present, and 
invested in future production : now, it is want of thought for the 
future : and this want of thought confers, at the same time, on 
the present enjoyment, and on the present goods which minister 
to it, a preference over future. The spendthrift, greedy of 
pleasure, values present goods more highly than future, because 
he wishes to enjoy them in the present. — If bad provision goes 
along with small foresight, the two effects, as we have seen, are 

Or, third, the individual is well provided, and takes due 
thought for the future. In this case, of course, the two former 


sanctions of the preference do not come into play at all, or 
scarcely at all. In this case, beyond the satisfying of the 
immediate wants, the other course is economically open, — of 
investing a portion of his present goods in production for 
the future : thereby their economic centre of gravity, their 
marginal utility, and the formation of their value, are shifted 
to a sphere in which present goods enjoy a preference in value 
under the third sanction, that of their greater productiveness. 
A moderately rich and prudent man who has £10,000, must 
not, and will not Consume his £10,000 in the present, but will, 
in any case, save for the service of the future. But if any one 
were to make him the proposal, to exchange his £10,000 
of present money for £10,000 of future money, he would be 
fully justified in declining the transaction; as, with £10,000 
(now) he can provide more effectually and richly for the future 
than with £10,000 at a future period. 

But, finally, there is still a fourth case conceivable : an 
individual may be so badly off in the present, or have so little 
thought for the future, that, on those two accounts, he values 
present goods more highly than future. At the same time, 
however, he is tempted by business which promises him so 
good a return in the future that he stints himself still further 
in his present provision, and engages in the business. Here, 
after the analogy of the case worked out on p. 165, the avail- 
able sums of goods are directed, successively, into the most 
important employments of the two spheres taken together, and 
the competition of these future employments has for result 
that the satisfaction of present wants is broken off at a higher 
point or level than it would otherwise be. This must, in the 
end, raise the value t>f present goods, and indirectly increase 
their superiority over future. 1 

Thus the various sanctions come alternatively into play. 

i Suppose, e.;/., that a man has 6 units of goods, say 6 five-pound notes, at 
his disposal. There are present groups of wants, which these irbtcs could supply, 
and their importance is indicated by the figures 10, 9, 8, 7, 6, 5. Now there 
appear opportunities of employing these in business transactions which will not 
yield any result for a year, but are so profitable that, even after deducting 
the necessary dis-agio on account of the year's delay, they are equal to a present 
utility of 7. The following will evidently be the disposition of the notes. Four 
of them will go to the present wants which bear the utility 10, 9, 8, 7, the 
remaining two to the future employments which, likewise, show the (reduced) 


Where the first two are active the third is suspended : but where 
the first two are not active, or not sufficiently active, there 
comes in the action of the third. One can easily understand 
how very directly this circumstance is calculated to give the 
phenomenon of the higher valuations of present goods an almost 
universal validity. The needy and the careless value present 
goods more highly because they urgently require them in the 
present, or only think about the present : the well-off and 
the saving value them because they can accomplish more 
with them in the future : and thus, in the long-run, every one, 
whatever his economical position, and whatever his economical 
temperament, has some ground for valuing present goods more 
highly than future. And, further, it is easy to understand how 
much the universal emergence of subjective differences in valua- 
tion must favour the extension of this phenomenon to the sphere 
of objective exchange value and price. If the third factor were 
to act cumulatively with the two first there would, indeed, be 
many who would value present goods at an extravagant rate, 
but it is not certain that there would not be as many,- perhaps 
an overwhelming majority, who would have no preference 
for present goods, and it is doubtful how, in this case, the 
resultant of exchange value would turn out. But as the third 
factor is alternative in its action, it levels up, as it were, the 
depressions instead of exaggerating individual heights ; thus it 
brings about a general raising of subjective valuations ; and this 
is necessarily connected with a raising of the average line, the 
resultant exchange value. 1 

figure 7. The marginal utility which attaches to the present five-pound note is, 
therefore, 7, while, without the competition of the profitable future employments, 
it would have been only 5. 

1 The statement of how the productivity of capital works into and together 
with the other two grounds of the higher valuation of present goods, I consider 
one of the most difficult points in the theory of interest, and, at the same time, 
the one which must decide the fate of that theory. It is just at this point that we 
discover the chief weakness in Jevons's otherwise suggestive work. None of the 
groups of phenomena concerned escaped his keen observation ; what did escape 
him was the way in which they work into one another. Consequently his work 
remains an eclectic piece of patchwork instead of being welded into an organic 
theory. He gathers together quite correctly all the primary phenomena required 
for the explanation. But he does not find the common channel through which they 
all work together to the one common end, and so he explains it differently from each 
different point of view, with a result that is eclectic and self-contradictory. After a 
most promising beginning he quite loses sight of the element of the different valua- 


Here we come to our last duty in this book : to show how 
the ratio that obtains between present and future goods in 
subjective valuations is transferred to their objective exchange 

In the case of the single individual, extremely various sub- 
jective valuations will be formed, according as the one or the other 
of the above-mentioned factors is stronger or weaker. These 
encounter each other on the market where present goods are 
exchanged against future. There are many such markets and 
they take many different forms. In the next book we shall 
more exactly examine their constitution. In the meantime 
we must be content to examine the method in which prices are 
formed in its most general and typical outlines. Indeed the 
formation of price here takes the same course as it does else- 
where. The divergence of the subjective valuations which 
encounter each other on the market makes possible, economically, 
the exchange of property between the two parties. 1 Those 
who, on any subjective grounds, put a relatively high value 
on present goods, appear as buyers of present against future 
commodities ; those who put a relatively low value, 2 as sellers : 
and the market price will be se tied between the subjective 
valuations of the last competitors who actually exchange, and 
the first competitors who are shut out, or, as we have put it, 

tions put upon present and future wants, and for the rest gives a double explanation, 
full of contradictions, and scarcely rising much above the level of the old classical 
economy, — part of it taken from the Abstinence, part from the Productivity theory. 
(See my Capital and Interest, p. 400. ) The not very independent treatment which 
the subject has received from Sax is in one respect better, while in another it is 
even more incomplete than that of Jevons. It shows an advance to find the 
element of the undervaluation of future wants generally interwoven into 
the explanation of interest. (See also on this point Launhardt, Mathematische 
Begrundung dcr Volkswirthschaftslehre, Leipsic, 18S5, § 2, and again my Capital 
and Interest, pp. 344, 427. ) But, on the other hand, it is a sensible omission that the 
difference between the values of present and future goods is traced exclusively to 
this factor, and that the much more important factor that co-operates with it, 
that of the greater productiveness, does not get even the scanty consideration 
it gets from Jevons. (Sax, Gmmdlegung, p. 314.) 

1 See above, p. 195. 

2 For reasons with which we are now familiar almost all the competitors, 
whether buyers or sellers, will value present goods, absolutely, above future. But 
the valuation will be higher on the part of the buyers, as a class, than on the 
part of the sellers. 




between the valuations of the two marginal pairs. We may 
represent the position of the market by the following scheme : — 

T , ,. Present 
Intending dg 

Bu y ers - in units. 

Next year's 
goods in 



Next year's 
goods in 


UCllC X O* 

in units. 


A x values 100 

= 300 

B x values 100 

= 99 

-A-o n 


B * 



A3 ,; 


B 3 



A 4 


B 4 



A 5 


B 5 



A 6 ,, 


B e 



Ay ,, 






A g „ 


B 8 



A9 j> 


B 9 



A 10 „ 


B 10 



In the circumstances of the market which this scheme 
represents, A 7 and B 7 form the upper marginal pair, A 8 and B 8 
the lower. The market price for 100 present units of goods 
will be fixed between 106 and 107, say at 106^ next year's 
units, and this determines an agio of 6^% in favour of 
present goods. 

Once a market price of this kind for present goods has 
been established, it exerts a reflex levelling influence on the 
subjective valuations which were originally so strongly divergent. 
Even those who, from personal circumstances, would value 
future goods only a little under, or perhaps at equal terms 
with, present goods, now value present goods according to the 
higher exchange value which the position of the market lends 
to them. This is the reason, and the only reason, why, in 
practical life, scarcely any one would be willing to exchange 
present goods against an exactly equal sum of future ones. 
There are plenty of people whose circumstances of want and 
provision for want are of such a kind, that the subjective use 
value of present and future goods to them stands almost equal. 
Jut the general position of the market is, almost invariably, 
50 strongly in favour of present goods, that it assures them a 
reference in exchange value, of which, naturally, every one 
(takes advantage. 

Developed market exchange, liowever, brings with it a 
levelling effect from another side ; that is to say, it brings the 


amount of agio in favour of present goods, as against future 
goods which fall due at variously remote points of time, into 
one normal ratio with the length of the elapsing time. It 
might easily be the case that the causes which tend to the 
undervaluation of future goods might chance to be quite dis- 
proportionately effective on goods belonging to different periods 
of time. Indeed, in the very nature of several of those causes 
(for instance, the consideration of the shortness of human life) 
they would scarcely obtain at all as against goods of the near 
future, while, as against goods of remote periods, they would 
obtain strongly and irregularly. In itself, therefore, it might 
be quite possible that, while 100 present units of goods, as 
against 100 units of next year's goods, obtained, in the market, 
an agio of 5 units only, as against goods of the next year they 
might obtain an agio of more than twice that, say 20, and, 
as against the third year's goods, perhaps an agio of 40. But 
such disproportionate prices for goods of different periods of 
remoteness could not long hold. By a kind of time arbitrage they 
would very soon be brought into an equal ratio. If, for instance, 
the various market prices mentioned above were found quoted 
at one given moment, speculators would immediately appear 
on the scene, who would sell present goods against two years' 
goods, cover the purchase by buying present against next year's 
goods, and arrange for paying the latter a year later by a 
second purchase of present against next year's goods. The busi- 
ness would work out thus. In 1888 the speculator buys 1000 
present units for 1050 units of the year 1889, and sells them 
at the same time for 1200 of the year 1890. In 1889 he 
has to deliver 1050 units, and he gets them by buying, again 
with a agio of 5%, the then present (1889) goods for the 
then next year's (1890) goods. For the 1050 units he 
requires to deliver he must thus give 1102^ units of 1890. 
But, from the first transaction, he then receives 1200 of these 
very (1890) units. He has thus, on the whole business, a 
utility of about 100 units. Such arbitrage transactions must 
evidently bring the prices obtainable for goods of various future 
years to a level. The speculative demand for the much under- 
valued two years' goods must raise their price; the supply of next 
year's goods must depress their price ; till such time as the agio 
is brought directly into proportion with the length of the time. 


When this happens — say, for example, that the agio has become 
equalised at 5 % per year, it may hold on at that rate undisturbed. 
For then it is equally remunerative to exchange present goods 
against next year's goods for three years, successively, or to 
exchange present goods directly against three years' goods, and 
the arbitrage we have just sketched has no further occasion to 
interfere in the formation of price. 

Thus we may accept the following as positive result of the 
present book. 

The relation between want and provision for want in present 
and future, the undervaluation of future pleasures and pains, 
and the technical advantage residing in present goods, have the 
effect that, to the overwhelming majority of men, the subjective 
use value of present goods is higher than that of similar future 
goods. From this relation of subjective valuations there follows, 
in the market generally, a higher objective exchange value and 
market price for present goods, and this, reflecting back on 
present goods, gives them a higher subjective, (exchange) value 
even among those whose personal circumstances happen to be 
such that the goods would not naturally have any preference 
in subjective use value. Finally, the levelling tendencies of 
the market bring the reduced value of future goods into 
a regular proportion to their remoteness in time. In the 
economic community, then, we find universally that future 
goods have a less value, both subjective and objective, corre- 
sponding to the degree of their remoteness in time. 





In the previous book I tried to show, and account for, 
the natural difference that exists between the value of present 
and the value of future goods. I have now to show that this 
difference of value is the source and origin of all Interest on 
Capital. But as the exchange of present commodities for 
future commodities takes various forms, the phenomenal forms 
of interest are as various, and our inquiry must necessarily 
deal with them all. In the following chapters, therefore, I 
intend to take up, in succession, all the principal forms of 
iuterest, and I shall endeavour to show that, notwithstanding 
all differences in shape and appearance, the active cause in 
them all is one and the same, namely, the difference in value | .. i, 
between present and future goods. 

By far the simplest case of this difference in value is 
presented in the Loan. A loan is nothing else than a real 
and true exchange of present goods for future goods; indeed, 
it is the simplest conceivable phenomenal form, and, to some 
extent, the ideal and type of such an exchange. The " lender," 
A, gives to the " borrower," B, a sum of present goods — 
say, present pounds sterling. B gets full and free possession 
of the goods to deal with as he likes, and, as equivalent, he 
gives into A's full and free possession a sum of entirely similar, 
but future, goods — say, next years pounds sterling. 

Here, then, is a mutual transfer of property in two sums 
of goods, of which one is given as recompense or payment for 
the other. Between them there is perfect homogeneity, but 
for the fact that the one belongs to the present, the other to 
the future. I cannot imagine how an exchange in general, 


and an exchange between present and future goods in 
particular, could be expressed more simply and clearly. Now. 
in the last chapter, we proved that the resultant of the 
subjective valuations which determines the market price of 
present and future goods is, as a rule, in favour of present 
goods. The borrower, therefore, will, as a rule, purchase the 
money which lie receives now by a larger sum of money 
which he gives later. He must thus pay an " agio " or pre- 
mium (Ajifijcld), and this agio is interest. Interest, then, comes, 
in the most direct way, from the difference in value between 
present and future goods. 

This is the extremely simple explanation of a transaction 
which, for hundreds of years, was made the subject of inter- 
pretations very involved, very far-fetched, and very untrue. 
Since the days of Molinaeus and Salmasius, 1 the Loan has 
been conceived of as a transaction analogous to the Hire ; as 
a transfer of the temporary use of fungible goods. This 
method of interpretation seems simple and natural enough. 
It has, too the advantage and support of being in harmony 
with popular ideas and popular speech. We do not say, " 1 
sell you, or exchange you £100," but, "1 lend you £100.' 
The transaction is a loan, and interest a usura, a use of 
money. But, before a scientific basis could be given to this 
popular conception, a whole series of subtilties had to be in- 
vented, and to obtain these out of the circumstances of actual 
life taxed all the resources of sophistry. 

First it had to be shown that, in transferring a thing, it 
is possible to transfer more than the whole of it ; namely, 
that in giving the borrower possession of the loaned thing, it 
is possible to transfer to him the right to all and every use 
that can be made of the thing, even to the consumption that 
annihilates it, and, besides that, the right to a separate kind of 
remnant use, for which a separate claim, the claim of interest, 
can be made. Then the further subtilty had to be invented, 
hat, in perishable goods — goods which perish in the act of 
use — there is, all the same, a continuous use, ever rising anew 
from its own ashes ; a use which lasts even when the good 
" used " has long ceased to exist ! It had to be discovered 
that a cwt. of coal can be burned to cinders on 1st January 

1 See my Capital and Interest, p. 29. 


1888, and yet be " used ' uninterruptedly throughout the whole 
year, and, perhaps, for live, or ten, or 9 hundred years to come ; 
and, what is best of all, that this lasting use can always be 
bought for a particular price, although and after the coal 
itself, and the right to consume it to the last atom, has been 
given away for another and a different price ! 

In my former book, Capital and Interest, I subjected this 
singular theory to a searching critical examination. I showed 
how, under peculiar historical conditions, it came into the 
world as the birth of circumstances, in which, to save interest 
and justify it against the unquestionably unjust attacks of 
the canonists, a decent foundation had to be found for it at 
any price, or, if not found, invented. I showed that this 
theory had its troubled source in a fiction. It was a fiction 
adopted, in its time, by the old jurists, in full consciousness 
that it was simply a fiction set up for certain practical legal 
purposes ; but afterwards, by a strange misunderstanding, this 
fiction was adopted as a sufficient scientific fact. I tried, 
further, to show that this theory is, in itself, full of mistakes, 
internal contradictions, and impossibilities, and how, finally, 
when carried to its logical conclusion, it leads inevitably to 
further contradictions and impossibilities. In opposition to it, 
and in place of it, 1 now offer my own positive theory, then 
unpublished, and confidently leave it to the reader to judge 
on which side lies illusion and error, and on which truth. 1 

I would gladly refrain from any further commentary 
here, were it not that, quite recently, we have had a new 
literary pronouncement in favour of the Use theory which I 
opposed, and directed against the Exchange theory which I 
advocated ; and were it not that this revived pronouncement 
emanates from no less authority than Karl Knies. ^-^ 

In 1885 Knies published a second edition of his book 
Das Geld. In it he replies to the criticism I made on 
some passages of his first edition, and, at the same time, 
expressly repeats certain positive objections he had made to 
the conception of the loan as an Exchange. On both counts 
I feel bound to answer. 

It is unfortunate that Knies's reply touches only one of 
the many points on which I attacked his Use theory. I had, 

1 See Capital and Interest, pp. 214-259. 


among other objections, put forward this ; — that his method 
of proving the actual existence of a durable use in perishable 
goods rested on a dialectical confusion ; and I had endeavoured 
to strengthen my contention by an exact analysis of the very 
words of his argument. 1 To this Knies answers that I have, 
notwithstanding, mistaken his meaning, and he repeats his 
positive statement in such "altered expression, and with such 
additions " as may put his real meaning beyond question. As 
now put, Knies's demonstration is very much amplified (in the 
first edition it occupies pp. 72 and 73 ; in the second edition, 
pp. 106 to 114), but, substantially, I cannot consider it any 
more satisfactory. On the contrary, it seems to me to bring 
out more clearly that the existence of this durable use, which 
I disputed, is not proved, but only assumed. 

In one of the weightiest of the new passages (p. 109), 
Knies has no hesitation in explaining, in so many words, that 
in the Loan, although " not the same individual grains of corn 
and pieces of money are returned, but (only) an equally large 
and equally valuable amount of grains of corn and pieces of 
money," still, " to economical consideration, the same goods are 
given back." Here he sanctions the fiction of identity between 
fungible goods^ in optima forma, within the sphere of economical 
theory and economical discussion. All that follows he bases 
on the foundation thus obtained. He finds the essence of 
hire and lease in the fact that here "the hirer, leaseholder, 
etc., gets the land, house, or the like, transferred to him to 
use for his own purposes for such and such a continuous 

1 See Capital and Interest, p. 239. It goes without saying that I could 
mean nothing else than an involuntary dialectical confusion in the writer's 
mind, and nothing was further from my intention than to charge a scholar, so 
much esteemed by myself and by all the world, with wilfully misleading his 
readers. I should have thought that the very sincere expressions, in that and 
other writings, of the respect in which I have always held the person of that 
past master of our science, and particularly the express recognition of his 
"thorough and conscientious efforts" with which I introduced this very 
criticism (p. 239), might have sufficiently protected me against any such mis- 
conception. I was therefore more than astonished to learn that Professor 
Knies had taken my words as conveying an offensive imputation of wilful 
misleading of his readers. Although I scarcely think that any one of my readers 
will have understood me in this sense, I do not hesitate to explain here, 
emphatically and publicly, not only that I had not the slightest intention of any 
offensive imputation, but that I am exceedingly sorry if my inconsiderate choice 
of words should unwittingly have made such an interpretation possible. 

chap, i KNIES'S CRITICISM 289 

period, at the expiry of which he has to give back the good 
in question." In the Loan, perishable goods are likewise 
transferred " to be employed by the borrower for such and 
such a continuous but limited period of time." Consequently 
Hire and Loan are, essentially, analogous transactions — which 
was the point to be proved. 

To this I would simply answer, that the second premiss 
is not truth but poetry. The sober, prosaic truth is that, 
in the Loan, perishable goods are not transferred to the 
borrower "for a continuous but limited period of time"; they 
are transferred definitely and for ever ; they are never given 
back. What is given back is, in fact, other goods. What 
now becomes of the inferred analogy ? 

I am not blind to the use of analogies, and even to the 
demonstrative force which analogies may have under certain 
circumstances. I have myself often used them in the course 
of this book to drive home an argument. But an analogy is 
a weapon which requires careful handling. Comparisons, as 
every one knows, are always imperfect ; if the compared things 
have one side in common, they have always another in which 
they differ. The " legal person," for instance, may very well 
be compared with the physical person in questions relating to 
property, while, in questions relating to the family, it would 
scarcely be safe. If, then, we draw some conclusion from the 
similarity of two things, our conclusion must keep within the 
sphere in which the similarity actually exists ; from similar 
circumstances in one sphere we cannot draw a conclusion 
that the circumstances are similar in another sphere to which 
the similarity does not extend. No one, for instance, would 
consider an argument like this legitimate : — the legal person 
is as much a person as the physical person ; a physical person 
can marry ; therefore, a legal person also can marry ! 

Yet it seems to me that it is into this vicious and false 
use of analogies, that Knies and the other theorists of his 
school have fallen. I grant at once that, in a certain point of 
view, the individual goods replaced may be looked upon as if 
they actually were the same individual goods which were 
given away in the loan : they have identically the same effect 
on the economical position of the lender who receives them. 
Now, so far as the ground of this identification extends, so far 



also is one justified in drawing conclusions from it — but no 
further. The analogical conclusions of the Use theorists, 
however, are entirely beyond this justifiable sphere. What 
lias the theoretical question whether, in perishable goods, a 
continuous use is possible or not, to do with the fact that it 
is all the same, as regards the interests of the lender, whether 
he gets the individual goods X or the individual goods Y ? 
Nothing at all — any more than the question of the marriage- 
ableness of a legal person has anything in common with the 
fact that, in matters relating to rights of property, an institu- 
tion or a corporation may without hesitation be conceived of 
as an • independent " person " ! Indeed, if the reader will 
excuse a ridiculous but, as I think, a convincing example, one 
might as well use the identity of fungible goods to prove that 
oysters may keep fresh for ten years ; they have only to be 
lent out for ten years, and the lender receives " them " back 
still fresh oysters! The application is so evident that I need 
scarcely put it in words. The identity of the oysters lent 
with the oysters returned is no true identity, but only an 
identity assumed ad hoc. So far as concerns the practical 
interests of the lender the identity may pass, but, as a scientific 
question of fact, like the physical question whether oysters 
can remain fresh for ten vears, there is no identity at all. 
And just sitch a scientific question of fact is the question 
whether, in perishable goods, there is a continuous one year's 
or ten years' use. It is a question that must find its answer 
in considering the nature of the perishable good and the 
nature of the use ; properly speaking, not the shadow of an 
argument can be got from the fact that it is of no moment, 
as regards the practical interests of a person, whether he 
receives the particular good X or the particular good Y ! 

Now Knies does make the attempt — and tins is a second 
and indeed the weightiest of the new passages in this edition — 
really to point out a durable use in perishable goods, and 
to give some indication wherein that use consists. He names, 
by way of illustration, " the maintenance of life, and of 
labour power, the averting of a loss, the attainment of a 
business return or profit" (p. 112), as useful effects of this 
sort, which the borrower " may obtain and make for himself 
from the consumption (of the loaned goods) during the entire 


period of time before the similar quantum of perishable goods 
is given back." But by illustrations like this Knies again 
shows that he is on the wrong track. The enjoyment of 
effects indirectly obtained from the consumption of goods is 
not in the least a utility which we get in addition to the 
consumption ; it is just the utility we get from the consump- 
tion. Accordingly it can never be the ground of a special 
equivalent which we should have to pay over in addition to 
the equivalent of the perishable good itself. What would be 
said of a person who proposed to sell a cwt. of corn on the 
following terms : — " For the quarter of corn itself, that is, for 
all the useful services which may be got from the corn by its 
— sudden or gradual — consumption, I want thirty shillings. 
But for the lasting indirect use of the corn — the use which 
consists in the subsequent enjoyment of useful effects, such 
as life prolonged, labour power maintained, and so on — I want 
another shilling." Now, if, — as probably no one will deny,— 
in selling grain, it is not possible to conceive of the subsequent 
enjoyment as the ground of a special equivalent ; if the 
subsequent enjoyment is obviously included in the purchase 
price of .the good transferred into the buyer's possession ; it is 
inconceivable that, all at once, in the case of the loan (where, 
too, the quarter of corn passes into the full possession of the 
borrower, and justifies him in drawing all the uses he can 
from it), every indirect use is to be separately paid for. And 
why, again, should this indirect use be paid for only during 
one, five, ten years, or for so long as the loan runs ? Is 
the utility of sustained life not enjoyed so long as life lasts ? 
Is the utility of preserved labour power not one which lasts 
so long as we can work ? 

In Capital and Interest I had so thoroughly and, in my 
own opinion at least, so clearly laid down the facts about the 
lasting " indirect use," and shown the impossibility of its being 
the ground of loan interest, 1 that I really did not expect to 
see the thing emerge once more as stay and support of the 
Use theory. Least of all did I expect it from a writer who 
knew what I had said on the subject, and that without a single 
word of explanation being vouchsafed in answer to the objec- 
tions I had raised meantime. I cannot but express my 

1 P. 229, and pp. 235-239. 


regret — not indeed for personal reasons, but in the interest of 
our science — that Knies has taken so little notice of, and 
given such meagre answers to the theoretical considerations 
which I brought against the Use theory. He replies on one 
single point, and that a point which, however important it 
may be in itself, has only the importance of an incident in the 
struggle that is to decide the victory or defeat of the Use 
theory ; while, to the multitude of really cogent considerations 
directed against that theory as a whole — considerations which, 
quite apart from the issue of this incidental question, show it 
to be internally contradictory l and theoretically inadmis- 
sible, 2 — he has, unfortunately, found no word of rejoinder. 
Once submitted for discussion these considerations must be 
met, and certainly no one was more called on to speak in the 
defence of his own Use theory than was Knies. 3 

Hitherto the discussion h&.s been limited to attack and 
defence of the Loan theory of other economists. I have now 
to reply to an attack made on my own theory. The dis- 
tinguished writer we have just been discussing has now 
repeated the objection he urged some years ago against my 
conception of the loan as a true exchange ; it is, he^ says, in 
contradiction of the hitherto established conception of what 
an exchange is. " For an exchange — as we are not taking 
into account senseless and frivolous actions — takes place only 

1 Capital and Interest, pp. 228, 247. 

2 Ibid. p. 264. 

3 The criticism which Knies directs against me in the note to page 106 of his 
second edition is limited unfortunately to a few passing remarks on points which 
are, for the most part, of secondary importance. Moreover, several errors of fact 
have slipped into these, and two of them I cannot let pass unchallenged. First, 
I cannot admit that I have done what Knies ascribes to me, and explained that 
the replaceableness of goods — that is to say, the fact that one sample of a crass 
can be adequately replaced and represented by another — is simply a legal fiction. 
I only said that the actual identity of replaceable goods was a legal fiction 
i Capital and Interest, p. 253); and these are two very different statements. 
And, further, in my book I do not regard it as certain that, if a person speaks of 
uses in respect to perishable goods, he ought to point out, and wishes to point 
out, exactly the same kind of process of use as is to be observed in non-perishable 
goods. On the contrary, my entire criticism of Say and Schaffle (p. 232), 
of Hermann and even of Knies himself (p. .233), rests on the idea that it was a 
matter for the opposed theory to point out the existence of a something otherwise 
constituted than the usual material services, and that it had not succeeded in 
thi3 attempt. 


when goods different in some way or other are bartered. But 
fungible goods, such as grain of similar kind and quality, are, 
economically, recognised as entirely similar goods." 1 

I must say that this statement seems to me to beg the 
whole question. Instead of inquiring what the connotation of 
the conception of exchange is, and arguing from that whether 
the loan can be called a true exchange or not, Knies starts 
with a preconceived conception of exchange, and that an 
arbitrarily and unnaturally limited conception. As a fact, 
Knies's limitation of the conception of exchange to the barter 
of goods of different kinds is one we do not find in the nature 
of exchange, nor does it correspond with the "hitherto 
established " use of the conception. In the nature of exchange 
what is involved is that two goods are given, the one for the 
other — nothing more ; as to " established usage," it is very easy 
to show that transactions in which entirely similar fungible 
goods are bartered for one another are considered by all the 
world true exchanges, and are called so. In proof of this I 
might point out that two people, simply from whim or fancy, 
will " exchange " two fungible goods, the one for the other, 
e.g. two new copies of the same book. Knies guards himself, 
indeed, against this argument by saying that "we are not 
taking into account frivolous and senseless actions," but this 
is making too light of the matter. For, certainly, it cannot 
be denied that such capricious actions may happen, and occa- 
sionally do happen, and it cannot very well be denied that 
such transactions, when they do happen, are neither Hire nor 
Loan, nor anything else than true Exchange. 

But there is no need to appeal to rare cases like these. 
There is one group of instances where men, quite deliberately 
and on entirely rational economic grounds, do barter similar 
fungible goods ; that is where goods, otherwise perfectly 
similar, are available under different modalities — to use a 
philosophic term — as, for instance, in different places. Take 
the case of a farmer A, who owns a plantation of trees two 
hours' journey away from his farm, while there is a plantation 
belonging to his neighbour B immediately beside him, In 
both plantations, the wood, cut or ready for cutting, is of 

1 Der Kredit, part i., Berlin, 1876, p. 10: shortly repeated without new 
arguments in the second edition of the book Das Geld, p. 106, note 1. 


exactly the same quality. Now, evidently, it is more convenient 
and more profitable for A to have ten loads of wood near his 
house than ten loads ten miles away from it. It will, there- 
fore, be considered quite reasonable, and quite intelligible, to 
propose that B should make over to A ten loads from the 
near plantation, in return for which A will give B ten loads — 
or perhaps twelve loads, including a premium — of the similar 
wood from his far-away plantation. And if this is agreed to, 
everybody would pronounce it a real and true exchange. 

Or can we imagine anybody, from the fiction of identity 
between fungible goods, drawing an analogical conclusion like 
the following about the nature of the transaction : — " A makes 
over to B ten loads of wood at a spot ten miles away from 
his house, and receives from B ten loads of wood here at his 
house. It is all the same to A whether he receives back the 
same ten loads or ten other loads. ' From an economic point 
of view,' therefore, it is essentially the same ten loads which he 
receives back, only at a different place. The essential nature 
of the transaction is, accordingly, not an exchange — since no 
exchange takes place between similar goods — but a transfer of 
the same goods to a different point in space, — that is to say, a 
freight transaction. And if, for the advantage which lies in this 
transfer from one place to another, A pays B a premium of 
two loads, the payment is essentially, from an economic point 
of view, an expense of carriage." I very much doubt whether 
anybody would follow him in this conclusion from analogy, 
although it is, feature for feature, the same as the one above. 
We should rather have expected that Knies would have been 
ready to own that the exchange of two amounts of wood, 
alike in every respect except that they are available in 
different places, was a real and true exchange. 1 

And now I ask : If it falls within the limits of the 
conception of exchange when goods present in one place are 
bartered for goods entirely similar but present in another 
place, with what right can we exclude from the conception 
the case where goods present at one time are bartered for 

1 I may note that it would be easy to multiply examples in which the same 
state of things occurs. Grain merchants, e.g. , may find it to their advantage to 
exchange stocks held in different stores ; bankers, to exchange sums of money 
disposable at different places, etc. 


goods entirely similar, but present at another time ? When 
so much has been made of analogies in the whole course of 
this controversy, why exclude the one analogy which is, 
most evidently, the appropriate one ? If the difference of the 
place at which goods are available is a sound economic reason 
for exchanging fungible goods that are in other respects 
entirely similar, and if the advantage and convenience of the 
present place may justify the claim and allowance of a premium, 
just as much may the difference of the time at which similar 
goods are available be a sound reason for their exchange, and 
a guarantee that there will be a premium on the — more 
valuable — present goods. This premium, and nothing else, is 

A great tree does not fall at one blow. And I cannot 
expect that a loan theory, which has dominated human intel- 
lects for centuries, should fall at the first attack. But I 
venture to hope that I have at least awaked a general feeling 
that it is necessary to submit the principles of that theory to 
critical revision. There is one task which the next economist 
who proposes to maintain the Hermann-Knies loan theory will 
not, I imagine, venture to omit ; namely, once and for all, to 
point out positively the existence of that " enduring use " of 
perishable goods, distinct from their consumption, for which 
interest is supposed to be paid, and to say, clearly and dis- 
tinctly, wherein that use peculiarly consists. Up till now its 
defenders have acted in a somewhat curious way ; they have 
pointed out, by more or less questionable analogies, that, in 
the loan; a temporary use is transferred, and concluded from 
this that there must be such a use ; the consequence being 
that — with the exception of this last unfortunate attempt of 
Knies's — the nature of the use, its contents and so on, were 
left entirely in the background. I consider that our science 
has a right to demand the opposite and the natural method of 
demonstration. Let it first be shown that there is such a use, 
and wherein it consists ; if that can be done, we shall willingly 
believe that it is transferred in the loan. If that cannot be 
done — and I doubt very much if it can — then I shall have 
the greater confidence in pointing to my solution of the 
question. To the latter, at any rate, I have no fear that 
the stigma of sophistry and unnaturalness can be attached. 


Passing from this polemical digression — which I considered 
only due, as well to the importance of the subject under 
dispute, as to the scientific standing of my esteemed opponent, 
— let us return to the main subject. According to our con- 
ception interest is a complementary part of the price payable 
for a sum of present goods in future goods. It is a part- 
equivalent of the principal " lent. In itself there would be 
nothing to prevent this part-equivalent being paid along with 
the bulk of the price ; in other words, interest and " principal " 
might be put together in one single payment at the end of 
the whole loan transaction. Eeasons of practical convenience 
have, however, made it the general rule that, in loans made 
for any considerable length of time, the premium should be paid 
separately, and in rates graduated according to time, — monthly, 
half-yearly, yearly, etc. With the essential nature of interest 
this method of payment has nothing to do ; it may, indeed, be 
expressly provided otherwise by the loan contract. But quite 
possibly it is the case that this custom, which, practically, has 
prevailed from time immemorial, of separating the payment 
of interest from the payment of principal, has assisted — perhaps, 
even, directly caused — the popular opinion that the principal 
sum paid back is, by itself, the equivalent of the sum originally 
given, and that interest is a thing by itself, an equivalent for 
another and separate something. 

Now and then a loan may be granted without interest ; 
but the reason of this is seldom or never that the market price 
of present goods, as against future goods, is so favourable to 
the latter, that, in the general loan market, they can purchase 
an equal amount of present goods without premium. Almost 
invariably these are cases where the lender dispenses with the 
payment of premium on some special personal ground, such as 
friendship, charity, humanity, class obligation, and so on. It 
has been usual to conceive of the loan without interest as a 
gift of the temporary " use " of the thing lent. 1 Our theory, 
of course, demands another conception. We put this kind of 
loan simply among cases where a man, from some personal 
motive, parts with his commodity under the market price. 
We say it is the same thing as where a manufacturer gives 

1 " A loan without interest is a gift of the use of so much capital," Roscher, 
Grundlagen, § 189. 


personal friends at the cost price, say, of 4s. the article wnich 
he can sell anywhere at the general market price of 5 s. 

Lastly, it very seldom occurs, and then never as regards 
present and future goods in general, but only as regards one 
particular kind of goods, that the relations of supply and 
demand are such, that future goods obtain a higher price than 
present goods of the same kind, and that a premium in present 
goods must be paid for future goods. It will only happen in 
cases where, presumably, the relations of supply and demand 
in the future will be essentially more unfavourable than in 
the present, and where, at the same time, for personal or 
technical reasons, it is not possible to preserve the present ample 
stocks till that future point of time when they are assured 
of a higher value. 1 Suppose the case of a brewer whose ice- 
cellars are too small for his requirements. If in January he 
puts in as much ice as the cellars will hold, and has still two 
hundred carts of ice over, he may be very willing to exchange 
these for one hundred carts of ice deliverable in August. 2 .But 
the possibility of such a case seems to me rather to afford a not 
insignificant proof of my loan theory. For, I should like to ask, 
how would the Use theorists explain this ? As a transfer of 
use like the loan ; only that the use has a negative value, 
and that the borrower, instead of paying a premium, demands 
a premium? Or, perhaps, as a storage transaction, the difference 
between the quantity given and that received being considered 
a fee for safe deposit ? 

I think both interpretations are so clearly artificial and 
fictitious that very few people would seriously entertain them. 
Probably the Use theorists would be quite willing to admit 
this as a case of real exchange ; but, so far as they did so, 
they would be untrue to their own contention, according to 
which exchange is only possible between goods of different 
kinds, and not between fungible goods of the same kind. 
Our theory, on the other hand, explains everything naturally, 
and by one formula. Without forcing an interpretation, it 
can recognise that, here, the position is exactly the same 
as in the loan. There is a mutual transfer of property 

1 See above, p. 251. 

2 Similar cases may perhaps occur after very abundant harvests, where the 
producers have not enough storage accommodation to secure the surplus. 


in two sums of goods, which are entirely similar in every 
other respect but that of being disposable at different points 
of time. And to this entirely similar state of matters it gives 
an entirely similar explanation : that, in both categories, there 
is an exchange between present and future goods, the prices of 
which are the resultant of the subjective valuations put upon 
these two classes of goods within the market. 




We come now to the principal form assumed by the interest 
problem. Among the phenomena of interest it is the one 
which has, practically, been of most importance. Usually, 
indeed, it passes for the spring and source from which all the 
others are derived. And it has chiefly been the attempt to 
explain this form of interest that has led to the terribly 
involved war of opinions which gave only too ample material 
for my Capital and Interest. 

A word or two will indicate generally the peculiar kind of 
activity which the undertakers exert, and from which they 
draw their profit. They buy goods of remoter rank, such as 
raw materials, tools, machines, the use of land, and, above all, 
labour, and, by the various processes of production, transform 
them into goods of first rank, finished products ready for con- 
sumption. In doing so they obtain — independently of com- 
pensation for their own personal co-operation in the work of 
production as leaders of industry, head-workers, etc.— a gain 
approximately proportioned to the amount of capital invested 
in their business. This gain is called by some "Natural Interest 
on Capital" or "Profit," and, by others, "Surplus Value." 
How is this gain to be explained ? 

I must introduce the explanation by establishing one 
important fact. Goods of remoter rank, although, materially, 
present commodities, are, economically, future commodities. 
As present commodities they are incapable of satisfying 
human want ; they require first to be changed into consump- 
tion goods ; and since this process, naturally, takes time, they 


can only render their services to the wants of a future period, 
— at the earliest, that period distant by the time which the 
productive process necessarily takes to change them into 
consumption goods. A group of productive instruments, such 
as Seed, Manure, Agricultural Implements, Labour, etc., which 
cannot be transformed into the finished product Grain under 
a year's process, can only serve for the satisfaction of next 
year's subsistence wants. In this respect, then, goods of 
! remoter rank available in the present (present productive 
j goods) are similar to future consumption goods ; their utility 
is a future utility ; they are " future commodities." 

It is evident that this fact cannot be without some far- 
reaching influence on the value which such goods obtain. As 
we know, we value goods of remoter rank, in general, accord- 
ing to the marginal utility and value of their finished and final 
products. The group of productive instruments from which we 
get one hundred bushels of corn, has exactly the same import- 
ance for the satisfaction of our wants as the hundred bushels 
of corn into which it is transformed. But these hundred 
bushels, the value of which is the standard for the value of 
the productive group, are still, for the time, a hundred future 
bushels, and, as we saw in previous chapters, future goods are 
worth less than present goods. A hundred future bushels are, 
therefore, w T orth, we may say, only as much as ninety-five 
present ones. From this it follows that Means of Production - ! 
i also, if estimated against present goods, are found of less value 
than the amount of finished and final products which can be 
made out of them. Our group of productive instruments^ 
which, in a year's time, will furnish us one hundred quarters 
of grain, is equal in value to one hundred quarters of next 
year's grain ; but, like that grain, is equal to, say, only ninety- 
five quarters of this year's grain. Or, if we translate the 
whole matter into terms of money economy, and assume that, 
next year, the quarter of corn will be worth twenty shillings, 
then our group of productive materials, wherewith we hold in 
our hands the condition of our obtaining a money return of 
£100 next year, is equal in value to £100 next year, but to no 
more than £95 now. If, then, we buy or exchange these means 
of production now, the purchase price, naturally, is measured 
in present money, and we buy them for a smaller number 


of pounds sterling than they will bring their owner in the 

This, and nothing else, is the foundation of the so-called 
" cheap " buying of productive instruments, and especially of 
labour, which the Socialists rightly explain as the source of 
profit on capital, but wrongly interpret, in round terms, as the 
result of a robbery or exploitation of the working classes by 
the propertied classes. The buying is not so cheap as it seems. 
The' appearance of cheapness comes, for the most part, from" 
this ; that the price is measured by a different standard from 
the commodity ; measured, as it were, by one of these cheap 
measuring tapes which stretch with wear and indicate a foot 
by 1 1 inches. The means of production, and their result, — 
the finished product towards which the buyer is looking in 
purchasing them, — are future commodities, and the price is 

measured and paid in (more valuable) present goods. That, / 

in this case, the greater number of less valuable future goods \ 
is purchased by a smaller number of more valuable present \ 
goods, is not " cheap buying," any more than it would be cheap 
to acquire one hundred florins of fifty florin standard for ninety 
pieces of forty-five florin standard. The circumstances off 
possession are only to a very limited extent responsible for the 
fact, that the future commodity which the labourers have to 
sell (their labour), is less valuable than the present goods 
which the capitalists have to offer (wages). For the mostj 
part, it is elementary facts of human nature and the technique 
of production that are to blame ; facts which we have gone 
into in detail in the foregoing book. The social importance 
of the phenomenon of' interest, however, will take up our 
attention later on ; in the meantime I have only to explain 
what Interest is, and why it is. <-J 

Knowing now that the undertaker buys the future com- 
modity, "Means of Production," for a smaller number of 
pieces of present goods than the number of pieces which 
will compose their future product, we ask, How does he 
come by his profit? The answer is very simple. From 
his " cheap " purchase, indeed, he does not get any result ; 
for, estimated by its present value, the commodity is dear. 1 

1 Of course it may happen in individual cases, that, outside of the reasons for 
apparently cheap buying discussed in the text, there may be other reasons for 



The profit comes first into existence in his hand. It is during 
the progress of production that the future commodity ripens 
gradually into the present commodity, and grows at the same 
time to the full value of the present commodity. Time 
elapses ; what was next year becomes this year ; and on the 
great changing stage of life everything — man himself, his wants 
and wishes, and with them the standard by which he measures 
his goods — shifts one scene forward. The wants which, last 
year, were future wants, and little thought of as such, attain 
their full strength and their full right of present wants ; and 
a similar advance attends the goods which supply these wants. 
A 'year ago they were goods of the future, and had to be 
content with the lower value that attached to them as such : 
to-day they are present goods, ripe for consumption, and enjoy 
the full value of such goods. A year ago it was to their preju- 
dice that they were measured in the, then, " present " goods. 
To-day that standard has sunk into the past, and if the men of 
to-day measure them again in " present " goods, they stand equal 
with them in the "first and chiefest rank, and suffer nothing by 
the comparison. In short, as time passes it cancels the causes 
by reason of which the then future commodity suffered a 
shrinkage of value, and brings it up to the full value of the 
present good. The increment of value is the profit of capital. ( 
This is not to say, of course, that, to make present goods - " 
out of future goods, it is sufficient that time should elapse and 
the future become the present. The goods themselves must* 
not remain stationary. On their part they must bridge over 
the gap which divides them from the present, and this they 
do through the production which changes them from goods of 
remote rank into finished and final producti. If there is no 
production process, if the capital is left dead, the means of 

really abnormal cheap buying ; as, e.g., skilful utilising of favourable conjunct- 
ures, usurious oppression of the seller, and, in particular, of the labourer. The 
emergence of such factors in this case results in a still further limitation of the 
purchase price, and in the obtaining of an extra profit. This extra profit is to be 
distinguished from normal profit on capital in every respect?: in its nature — for it 
is not a true profit on capital but strictly a profit of the undertaker : in its 
theoretical explanation — for it owes its origin to other and quite special causes : 
and, finally, in the social and political judgment we must form of it. I need 
scarcely say in so many words that what is said in the text has only to do with 
profit on capital pure and simple. 


production always remain undervalued future goods. In the 
year 1888, a group of means of production which can be 
changed into a finished product in a j^ear's process, — that is 
to say, by 1889, — is one year away from satisfying the wants 
of the present. If this group is left unused till 1889, its 
product, of course, cannot now be obtained till 1890 at the 
earliest, and it remains, as before, one year away from satisfy- 
ing the wants of the present ; its value has no opportunity to 
expand, and suffers the common fate of " dead capital " ; it 
bears no surplus value, and no interest. 

This is the truth about Undertakers' Profit, and I trust 
it will be found simple enough. The Socialists are fond 
of calling this profit " surplus value." The name is more ^ 
applicable than they have any idea of. It is, literally, a profit 
from the increment of value of the future commodity transmuted, 
in the hand of the undertakers, into a finished present good. 




The principle laid down in last chapter is simple, but in 
practical life it is, as usual, obscured by a multitude of casuist- 
ical details and developments. These do not, indeed, prevent 
its operation, but they conceal it under various phenomenal 
forms such as make recognition of it not always easy. Some 
,of these developments we must take up, and we shall begin 
with one of the simplest. 

The contraction of value from which, in our estimation, 
future goods suffer, is, as we know, by no means uniform for 
all future goods. It is graduated according to the time which 
intervenes between the present and the date at which the 
goods are ready for use. £100, for instance, which will be 
available in a year's time, will be valued at, perhaps, something 
like £95 in present money; £100 available in a couple of 
years, at £90; £100 available three years hence at £85, and 
so on. 1 To this graduated contraction of value corresponds a 
steady graduated increase, in value of those goods which are in 
process of ripening into present goods. A group of instruments 
which, at the end of a three years' production process, promises 
a product of the value of £100, and, in virtue of that promise, 
is valued at £85 at the beginning of the process, does not 
remain stationary at the value of £85 till the moment when 
the production is completed, and then make one bound up to 
its full present value of £100. Its value increases gradually 
as the time passes which divides the group from maturity, and 
the production process nears its completion. This circumstance 

1 Not quite exactly : for easier understanding the figures in the text are 
calculated roughly, and without consideration of compound interest. 

chap, in COMPLICATIONS 305 

is of great practical importance. Under the division of 
labour, scarcely any kind of production is carried through 
from beginning to end in the hands of one person. The 
separate stages of production become branches of production, 
visibly independent, and conducted by separate undertakers. 
As the value thus increases by stages, a corresponding gain 
accrues, as profit on capital, not only to the last undertaker, — 
the one in whose hand the good becomes an actual present 
commodity, — but to each of the undertakers, even to one who 
has brought the product only a single step nearer maturity. 

A very common complication arises from the fact that 
productive goods contribute various portions of their useful 
content to the making of various final products, which products 
arrive at maturity at various points of time. This is the case 
with all durable productive goods. A plough, for instance, 
which lasts twenty years, will contribute a twentieth part of its 
life-work and use to the ingathering of twenty different harvests. 
Corresponding with this twofold property — that of being 
means of production, and at the same time durable goods — such 
goods, both in the formation and in the increase of their value, 
manifest a peculiar combination of phenomena ; they unite the 
phenomena already known to us as characteristic of ■productive 
goods with certain other special phenomena which accom- 
pany all durable goods — even those that are not devoted to 
productive purposes. We have, however, to deal particularly 
with this latter class of phenomena in a later chapter, and 
accordingly we must postpone the full explanation of this 
complication until then. 

Another complication arises from the fact, that almost all 
productive instruments admit of various kinds of employment, 
and that these employments turn out their finished products 
at different points of time. 1 The same fuel, for instance, may 
be employed in cooking a meal, or in keeping up a smithy fire 
where the tools are made for boring a coal seam. In the 

1 The analysis which follows is devoted to the circumnavigation of one of those 
hidden rocks which, I suspect, might rise suddenly in the way of those readers 
who venture on their own account to go further into the circle of ideas here 
opened up. The digression which it necessitates forms one of the numerous 
sacrifices of time which I imagine myself compelled to make with a view to the 
safety of my theory, at the cost of brevity and ease of comprehension. 



lirst case, only a few hours elapse till the finished product is 
turned out ; in the latter it may be years, perhaps decades of 
years. This is true in particular of that most important 
productive good, " unskilled labour." Various portions of it 
are always being employed simultaneously for productive 
purposes that come to maturity in the most varying periods of 
time. Some labourers must always get finishing work, which 
pays its wages almost on the moment ; others must be em- 
ployed in the intermediate stages; others, again, at the very 
beginning of the total work of production. Yet none of 
them has it written on his forehead whether his work is spent 
for the present, or for the coming year, or for the remote 

At first sight it might appear that this complication must 
sensibly prejudice what we have laid down as to the formation 
and the increase of value. Here is a good which will be 
used, perhaps as a present good, perhaps as a future good. 
Suppose that it is valued as a future good, and therefore suffers 
a proportionate diminution of value, it seems as if this diminu- 
tion were unjustifiable if, after all, the good is used as a 
present good. But, again, suppose it is valued, without deduc- 
tion, as a present good, and is, after all, employed as a future 
good, there is no room for increase of value. But obviously, 
again, it is least of all possible to estimate different portions 
of the same commodity at different values, — one portion as a 
present good without deduction, another as a future good with 
deduction. Of ten loads of fuel of exactly the same kind and 
quality, one load is worth just as much as the other, as well 
to the householder as in the timber market. 

The apparent difficulty, however, entirely disappears if we 
apply the universal law of value carefully to the special cir- 
cumstances of the case. The value of a good is determined 
by its marginal utility. This marginal utility is the least 
important use or employment that is provided for out of the 
available stock of goods. Suppose the stock contains five 
hundred pieces of a kind which we shall call A. These goods 
possess the three-fold capability of serving (1) immediately as 
consumption goods, (2) as means of production in a five years' 
process, or (3) as means of production — in another branch of 
employment — in a ten years' process. If they are used for 

chap, in COMPLICATIONS 307 

immediate consumption the capabilities are as follows : — one 
hundred pieces can be used with a useful result which we shall 
represent by the figure 6, another hundred with a result which 
we shall call 5, and a third hundred with a result which we shall 
call 4. But if the goods are employed in a five years' produc- 
tion process, there will be a product' — call it X — of which the 
first hundred can be remunerative at 9, the second at 8, and 
the third at 7 per piece. 1 But these products will not be 
available before five years. In to-day's estimate, therefore, 
their value, like the value of all future goods, suffers a reduc- 
tion : the amount of this reduction depends upon the amount 
of the agio which emerges in favour of present goods as resultant 
of the many intersecting subjective valuations in the market. 
If this agio, for instance, amount to 5%, the value of the 
products available in five years, as compared with present 
goods, suffers a reduction of a little over a fifth part. 2 In the 
valuation of to-day, therefore, the prospect of obtaining in five 
years, from one of the pieces employed as a means of produc- 
tion, a product which will then have the value of 9, is equal 
to a use realisable at the moment of 7 '05. In the same way 
the prospect of obtaining products of the value of 8 and 7 in 
five years is equal to present uses valued at 6*26 and 5*48 
respectively. Similarly if the goods are employed in a ten 
years' production process. If this gives the prospect of 
obtaining a product — call it Y — of which the first hundred 
can be remunerative at 16, the second hundred at 12, and the 
third hundred at 8, these products, as not available before ten 
years, suffer a reduction in to-day's estimate of something 
like two-fifths, and are equal, respectively, to 9 '8 2, 7 '3 5, and 

If we group together the present valuation of all these 
possibilities, we get the following table. 

1 In order to remain true to actual cases, so far as possible within the narrow 
limits of the illustration, I purposely assume that the value of product d-ecreases 
as production in the same branch increases — the more units the less the value of 
each unit. The fact that even the most remunerative branch of production 
ceases to be remunerative when it is over-stocked, is the very thing that makes 
it possible for means of production to seek different employments simultaneously 

2 To be accurate it is 21'65%, or a'S 100 :78'35. 




* 8 

In immediate 

In a five years' 

In a ten years' 










The stock of five hundred pieces admits of only five of the 
above possibilities being utilised. Naturally those five will be 
taken which, in the valuation of to-day — the only standard 
for to-day's decision — are the most remunerative. They are 
indicated in the above table by black figures, and we find 
them to be as follows : — 

100 pieces used in immediate consumption; 200 pieces 
employed in a five years' process, in making the goods X; 200 
pieces employed in a ten years' process, in making the goods Y. 

The least remunerative of the employments indicates the 
marginal utility, and with it the value of the single good A. 
That least remunerative use bears the value 6, and, as it 
happens, belongs to the present. A good of the class A, then, 
will be valued at 6. 

How does this stand now as regards the increment of value 
and the interest on capital ? In the case of the hundred 
pieces which are employed in the service of the present, and 
fetch a utility measured by 6, there is no room for an incre- 
ment of value. But as they afford their marginal utility 
immediately, they do not require to bear any interest. The 
pieces invested in the five years' process are worth 6, and in 
five years turn out a product which will be worth 8. 1 Here 
there is room for an increase, — at the usual rate of 5°/ for five 

' /o 

years, — in the ratio of, say, four to five ; that is, from 6 to 7*5. 

1 If 200 pieces of the good are produced naturally all the pieces obtain one 
equal value, and not only the second hundred but the first hundred gets its value 
according to the lower rate of 8, at which the second hundred can be made 

chap, in COMPLICATIONS 309 

Indeed, the room for increase, and the gain in value, is much 
greater. Beyond the normal interest, which is secured when 
the product obtains the value of 7 '5, there is a further profit 
of 0*5 per piece as premium for finding and utilising the most 
favourable opportunities of employment in the present con- 
juncture ; in other words, as undertaker's profit. But usually 
this premium will not long continue. According to principles 
with which we are familiar, its existence attracts competition, 
and competition depresses price. How far will it depress it ? — 
Not lower than 7 '5, for 7 '5, obtainable in five years, is equal, 
in present valuation, to 6 of present money, which is just the 
value of the productive good itself. Anything less than this 
price of 7*5, consequently, would not be thought a sufficient 
equivalent for the sacrifice of a good valued at 6, and, in this un- 
remunerative branch, production would be suspended until the 
limitation of supply again raised the price of the product to 7 "5 
of future money, as equal to 6 of present money. This being 
a state of things favourable to permanence, although the produc- 
tive (and, therefore, future) good has received its value of 6 from 
a marginal utility which belongs to the sphere of the present, 
and so suffers no deduction on account of its future nature, 
there remains quite sufficient room for a rise to the higher 
value of the future product. 

It is the same with the value and increase of value of those 
pieces invested in the ten years' process. At the moment, valued 
at the common marginal utility, they are worth 6. Their 
product, which becomes attainable in ten years, will then be 
worth 12. This leaves room for the normal increase of h°/ o 
per annum from 6 to 10 ; and, therefore, over ten years, 
makes possible an increment of about two-thirds of the original 
value. Beyond this again it leaves room — at least in the first 
instance — for the obtaining of an undertaker's profit. Should 
this profit disappear later on in consequence of competition, 
the future value of the product remains, all the same, at 10, 
and thus leaves room permanently for the normal increase of 
value, in which consists the customary interest. 

Thus we see that, although all the pieces of class A were 
valued at the one figure, this one value guarantees to each of 
the possible uses exactly that room for increase of value which 
the remoteness of its finished and final result demands. To 


the immediate use, where the utility of the good is at once 
realised, it guarantees nothing; to the five years' process it 
allows an expansion of about one-fourth ; to the ten years' 
process an expansion of about two-thirds more than the 
original value. Perhaps there is even a greater expansion, in 
which case there remains a premium to the undertaker, but, 
in any case, it guarantees the expansion just named. 

And this nice harmony is easily explained from what has 
just been said. In estimating the present value of the many- 
sided good, its possible future employments had already been 
reduced to present value, whereby they experienced a discount 
in exact ratio to their futurity. But only those future 
employments are found economically permissible, whose 
present (reduced) value is, at least, equal to the fixed 
value of the good, and whose effective future importance, 
therefore, is at least greater by the amount of the discount 
made pro rata temporis. Therefore each of these future uses 
has assured it in advance a corresponding scope for recovery 
of its Value. The lapse of time replaces the value which was 
taken from the estimate by way of discount, and this, in the 
near-hand uses which require to bear little interest, is small, 
and is correspondingly great in the remote uses which must 
bear much interest. 1 

What has here been represented on a small scale by one 
slight instance, obtains over the whole field of industrial employ- 
ment. It is not a few hundreds, but millions of productive units 
— days of labour, tons of coal, bars of iron, and so on — that 
are invested ; they are invested, not in two, or three, but in 
hundreds and thousands of separate employments ; and each 
of these employments has a different period of production. 
All those means of production enjoy one homogeneous market 
price. That price is formed by the available stock being 

1 By varying the figures the reader may very easily convince himself that 
exactly the same result emerges if the marginal utility, which determines the 
value, lies within the sphere, not of the immediately remunerative, but 
of the productive employments. The only difference is that, in this case, the 
chances of a temporary "conjuncture profit" between the individual branches 
of employment, are somewhat altered. That production which itself yields 
just the marginal utility bears no conjuncture profit, while such a profit is now 
possible temporarily in the present employments, and in the other branches of 

chap, in COMPLICATIONS 311 

distributed out among the most remunerative employments, 
and according to the degree of advantage which they bring. 1 
The most remunerative branches, in virtue of having the 
strongest purchasing power, are supplied lirst and with the 
greatest certainty ; then the next remunerative branches ; and 
so on down the scale till the stock gives out. Some last 
portion of the stock, then, is taken for some last branch of 
employment, and the modest advantage that accrues determmes 
the modest measure of what those last buyers can pay for the 
productive unit. But as the market price for all portions of 
the commodity is a homogeneous one, the value of the 
employment last supplied determines the total market price 
of the means of production But how, then, has the advantage 
and value of the individual kinds of employment been 
determined ? — By applying the same discount to employments 
for future advantage as has been described in our illustration ; 
only that, in rough, practical life, the discounting is made in 
a rough way that takes a great deal for granted. In 
practical life men generally find already in existence the 
things of which we have tried to explain the elements, and 
are glad to accept them, without much reflection, as accom- 
plished facts. In the same way do they take interest for 
granted as an every-day fact, and without more ado, in all 
calculations relating to future employment, they add or deduct 
it. If an undertaker is considering whether or not he should 
lay out one hundred pounds on a productive instrument 
which will yield a result in two years' time, he simply 
calculates whether the future return will leave, at least, one 
hundred pounds over and above the two years' interest, and 
after deduction of the same. If he has thus deducted, in 
advance, from the future result an amount of interest propor- 
tioned to time and capital, it is a very natural thing that the 
future proceeds, when actually realised, should contain and 
yield that very amount of interest. 

The foregoing cases do not by any means exhaust the 
series of casuistical complications which obscure the working 
of our principle in the infinite variety of practical life. 
Happily it is not necessary to exhaust them. Many are not 

1 See above, p. 230. 


of sufficient importance to justify us going into the tedious 
abstract demonstrations that would be needed to explain 
them, and, for the rest, I venture to hope that, in what has 
been already said, the careful reader will find enough to 
guide him among complications not expressly discussed, 
without further assistance from me. 

There still remains for us, however, another important 
and by no means easy task. It is, in a word, to follow the 
abstract into the actual, and give it form and colour. Hitherto, 
by an argument which I hope is incontrovertible, but which I 
know to be highly abstract and general, I have tried to prove 
that it must be as I have maintained : I have now to show 
how it actually is so in the world of industry. So far I have 
deduced everything from the general proposition that pro- 
ductive goods are, by nature, " future commodities." I have 
shown that, as logical result, the general reasons which explain 
how future commodities have a less value, must also apply to 
productive goods, and thus explain how there is room for 
expansion into the full value of present goods, and for the 
appearance of a surplus value. I shall now attempt to show 
positively that all this is as I have said, and why it is. To 
this end I shall give a description of the markets, where, in 
economic life, means of production or productive instruments 
are exchanged against present goods, and shall try to show 
that, in these markets, the same motives, to which we 
ascribe in general the power of calling forth a difference of 
value between present and future goods, do really emerge, 
and emerge indeed in such combinations, and with such 
strength, that, as the result of the formation of price, there 
must always appear a disagio to the prejudice of the means 
of production. In doing so I hope not only to bring forward 
an adequate proof of the correctness of my general deductions, 
but also to obtain a number of new and important lights on 
the subject generally. 





The exchange of Means of Production against final and finished 
present goods — practically against Money — is made in three 
kinds of market : the Labour market, the market for Uses of 
Land, and the market for Intermediate Products, such as 
raw materials, tools, machines, factories, etc. Inasmuch as 
labour and uses of land are the original means of production 
from the co-operation of which all finished products come 
into existence, the formation of their price is peculiarly the 
one which decides the existence of profit on capital. In the 
markets for intermediate products we have only the continu- 
ance of a process which has received its own peculiar impulse 
in the other two markets. And, of these two markets, again, 
the labour market is by far the more important. I shall, 
then, first take up the circumstances of this market, and 
shall endeavour to show and explain how the market price of 
the productive good " Labour " must always be less than the 
value and price of the finished product of labour. 

Let us assume that, in the methods of production current 
in economical society at the moment, the making of a product 
ready for consumption reqiiires a period of time extending 
in all over two years. The technical productiveness of this 
method, we shall assume, is such that it takes a week's labour 
to turn out a product which will have the value of 20s. 
The same product may be turned out by shorter methods, but 
the result will be disproportionately unfavourable. If a three 
months' process is adopted, the technical result falls to one-half ; 
if the worker has no capital, and his process is, accordingly, one 


that yields its return immediately, the productiveness falls 
to one -quarter; — that is, respectively, to 10s. and 5s. The 
price which can be paid for the commodity " labour " in 
these circumstances is the question now under discussion on 
the labour market between the labourer and the employers 
of labour. The price is fixed, in methods with which we are 
familiar, as resultant of the subjective valuations of both 
parties. How is it now with these valuations ? 

In the circumstances of modern industry, the wage workers 
scarcely ever possess sufficient means to utilise their own 
labour in methods of production extending over years. 1 They 
have, therefore, to face the alternative of selling their labour, 
or of employing it on their own account in such short and 
unproductive processes as the scanty means at their disposal 
permit. Naturally they will make that choice which is most 
advantageous to them. Those workers who are well enough 
off to embark, on their own account, on a production process 
lasting at least three months, and yielding a return of 10s. 
per week, will be willing to sell their labour at any price 
over 10s.; 2 at any price under 10s. they will rather work on 
their own account. On the other hand, those workers who 
are entirely without means, and who, working on their own 
account in a hand-to-mouth process, could only have a return 
of 5 s., will be willing to sell their labour at any price above 
5 s. As, unfortunately, the labourers who are entirely without 
capital, form to-day the great majority, we may assume for 
our illustration that the "Supply" of labour will be repre- 
sented by a long row of workers who are ready, in the worst 
case, to sell the week's labour for 5s., and a shorter row who 
will do the same for 10s present money. 3 

How is it now with the Demand for labour that confronts 
this supply ? 

1 Whether it take the form of completing the two years' production process 
from beginning to end by their own labour, or that of introducing their own 
labour at a later stage, — e.g. in the fourth half-year of the total production 
process, — and buying the fruits of the preparatory labour, — raw materials, tools, 
etc., — from the others who have performed that previous labour. 

2 The pleasure of an independent position may indeed very often create a 
preference for labour on one's own account, even although the labourer might 
obtain a somewhat greater income by taking a wage. Influences of this kind, 
however, can alter only the figures, not the principle. 

3 Of course the possibility open to the .labourer in question of realising 

chap, iv THE LABOUR MARKET 315 

The demand comes from the Capitalist-Undertakers. The 
valuation they put upon the labour thev wish to buy is so far 
more definite, inasmuch as the commodity labour, capable of 
so many employments, is looked at by them in connection 
with one definite employment; namely, the one carried on 
by themselves. To them, accordingly, the week's labour, 
which they wish to buy for the capitalist process, is worth 
just so much as the product which it will turn out in this 
capitalist process. On our assumption, this will be 20 s. 
available in two years. But the question for the undertaker 
still remains: whab are 20s., available in two years, worth in 
relation to the present shillings in which he must pay the 
week's labour. 

Once for all. let us make this entirely clear. If the 

capitalists were to realise their entire resources as present 

goods, — that is, to consume their wealth in present enjoyment, 

— the want of the present would evidently be provided for 

in superfluity, while the want of the future would have no 

provision whatever. They must, therefore, find it positively 

advantageous to change a part of their resources into future 

goods of some kind or other. In other words: if we look 

only at the relations of want and provision for want in present 

and future, present goods, as such, are worth even less than 

future to the owner of a stock of wealth which is greater than 

his present wants. It is true, of course, that there is a very 

simple way of changing present goods into future : they can 

be stored away either in natura, or in the neutral form of 

future money. This possibility naturally saves them from the 

prejudice to their value, which would, in itself, result from 

the overabundant provision for the present, hut, on the other 

hand, it does not give them any positive advantage in value, 

or, at any rate, a very trifling one. 1 

his labour in other branches of activity, can do little or nothing to alter the 
position of circumstances assumed in the text. For if the other branches are 
such as likewise demand a somewhat long production period the matter stands 
just the same with the labourer of this branch ; and the few branches which 
a man with no capital, or almost no capital, can take up with any result,— 
such as in particular the performance of personal services, domestic service, 
and the like, — can, from their nature, afford a remunerative refuge only to a 
limited number of workers, while any strong pressure would immediately result 
in overstocking and a corresponding curtailment of the advantage. 
1 See above, p. 250. 


Nor can the underestimate of future wants form a reason- 
able basis for any such advantage. It will seldom be strong 
enough to outweigh the counteracting consideration of the 
overabundant provision for the present, and to prevent the 
capitalists from preferring to employ part of their wealth in 
the service of the future. Persons, moreover, in whom this 
want of foresight might, exceptionally, be found, are not, or 
at least would not long remain, capitalists. An estimate 
like theirs, dictated by momentary desire and carelessness of 
the future, would soon bear its consequences, and bring their 
fortunes into spendthrift consumption. 

Of the three considerations, therefore, which, as we have 
seen, generally serve as foundation for the preference of present 
over future goods, the first two do not apply as regards the 
great majority of capitalists. It is our third consideration, 
the well-known technical superiority of present goods, or, as it 
is usually called, the " productivity of capital," which is decisive 
with them. The way in which it takes effect is essentially 
different in simple circumstances from what it is in the full 
development of our modern economic life. 

In simple circumstances, where the undertaker is himself 
a worker, and has no capital to speak of, present goods imme- 
diately obtain a higher use value. An undertaker, for instance, 
has just enough wealth to defray the subsistence of one working 
person for four years, — or to advance that amount. The choice 
is now open to him, either to work by himself in a four years' 
process, or to assume a helper and work alongside of him in a 
two years' process. In a two years' process the week's labour 
yields, as we have assumed, 20s.: in a four years' process — 
since longer methods are, technically, more productive — it 
will yield, say, 24s. The balance now stands as follows. 
If our capitalist pays his helper, for the week's work, the full 
20s. in present money, he has to pay him £104 for the two 
years' work ; from its product he recovers just this sum of 
£104; and finally, he can pay himself only 20s. a week, that is, 
in all, £104. His total net income, for the two years, thus 
amounts to £104. On the other hand, if, instead of spending 
£104 in paying a labourer, he spends it on his own mainte- 
nance during a third and fourth year of production, he may, 
from the 104 weeks of his own labour time at the higher 

chap, iv THE LABOUR MARKET 317 

rate of 24s. per week, recover £124 :16s.; so that his two 
years' net income is increased by £20 : 16s. In these circum- 
stances it is obviously more advantageous for the capitalist to 
have no helper. To obtain any advantage from a helper it 
must be possible to pay him at such a price, that the capitalist 
gains more by the buying of another person's labour than what 
he loses in the realisation of his own labour by the shortening 
of the production period: in other words, that 20s. a week 
present money paid in wages should bring him more than 24s. 
a week, future money, in products. This will only be the case 
if he can pay a weekly wage that is under 16s. 8d. J 

Were the circumstances of capitalist production generally 
so simple as this, the value to the undertakers of 20s. in future 
products would, speaking generally, be equal to the value of 
16 s. 8d. present money, — the actual figures varying a little, 
but not the tendency. And if the buyers value the commodity 
labour at not more than 16 s. 8d., while the sellers value it at, 
perhaps, 5 s. or 10 s., it is clear that the resultant of these 
valuations, the price of labour, will, in no case, exceed the 
amount of 16s. 8cL, and must a fortiori come under 20s., the 
full sum of the future product — which was the point to be 

But the circumstances of present-day industry are not so 
simple. The great majority of our undertakers are not them- 
selves workers, and their capitals, moreover, are generally so 
great as to be far above what any one man could use for his 
subsistence during the very longest practicable process. The 
possibility, which capital gives its owner, of employing his own 
labour in longer production processes does not, therefore, as a 
rule, under present conditions, give any higher use value to 
present goods. Our illustration of simple circumstances has 
very great importance in other lines of proof, — of which later, — 
but it does not suffice to explain the profit of capital in the 
circumstances of capitalist industry. These very complicated 
circumstances, however, develop a phenomenon which works, 
in another form, to the same end ; this phenomenon is Credit. 
The capitalist cannot use his present goods to make his own 
labour more fruitful, but others are willing to take them in 
exchange for future goods to make their labour more profitable, 

1 16s. 8d. : 20s. =£104 : £124 : 16s. 


and are very willing to pay an agio in future goods. And, 
evidently, the capitalist need not barter his present money at 
par with the workers for their future product, when he can 
obtain on the loan market, for a certain sum of present goods, 
a greater sum of future goods. 

One is tempted to apply this fact to the explanation of 
profit, as if it were owing to the chances offered on the 
market for loans that the capitalist's present goods had, in all 
cases, a higher subjective exchange value than future goods. 
But this is not my idea of explanation. We have no right 
either to represent loan interest as a, fait accompli, and explain 
natural profit on capital from it, or, conversely, to represent 
the latter as a fait accompli, and explain loan interest thereby. 
The fact is that the Loan market and the Labour market are 
two markets on which one and the same commodity is mutually 
offered and demanded, viz. Present Goods. On both markets 
the demand is for means of subsistence, with the view of 
making labour more profitable by longer processes of production ; 
only the circumstances of demand are different. For the 
present goods which he receives the wage worker gives, 
wholly and entirely, the indefinite future product which his 
labour may create : the borrower in productive credit — con- 
sumptive credit is much less important, but manifests its 
effects, in the long-run, in exactly the same direction — gives, 
in exchange for present goods, a definite quantity of future 
products, and, if the actual product differs from this quantity, 
may gain or lose by it. Thus wage workers and borrowers 
form two branches of the same demand ; they mutually 
support its effect ; and jointly help to form the resultant 
price. Only in outside appearance are they two distinct 
markets ; in reality they overlap each other ; and the market 
price of present goods is their joint result. 

To get to the root of the matter therefore, before consider- 
ing isolated and partial markets, we must take a comprehensive 
survey of that total market for advances of subsistence which, 
in every economic community, is built upon numerous com 
municating partial markets. 




At the outset we must enunciate a proposition, as simple as 
it is fundamental, but one on the proper understanding of 
which everything depends : In any economical community the 
supply of subsistence, available for advances of subsistence, is 
— with one trifling exception — represented by the total sum 
of its wealth (exclusive of land). The function of this wealth 
( Vermogeri) is to maintain the community from the time that 
their original productive powers are put in motion till these 
powers obtain their final and mature fruits — in other words, to 
maintain the community during the average social period of 
production. The greater the total stock of wealth in the com- 
munity the longer may be this social period of production. 

Here we really have three propositions, but they are so in- 
timately connected that they may be conveniently grouped into 
one, and explained and proved by one and the same argument. 

If we look at the uses to which a country's accumulated 
wealth is destined and put — leaving land out of account — we 
get something like the following picture. Some few owners 
of wealth, whether from necessity or from prodigality, them- 
selves consume it. Others who produce on a moderate scale 
for their own account spend their wealth in furnishing them- 
selves with the necessary maintenance during their production 
period. But all other wealth — and that is by far the greater 
amount — is, in some form or other, brought to the great 
market for Advances of Subsistence as Supply. The owner 
either puts it into some undertaking carried on by himself, or 
he lends it to other people. If he puts it into his own 


business it is, directly or indirectly, employed in giving 
advances of subsistence to labourers. I say directly or 
indirectly, for the division of labour, splitting up, as it does, 
the one united work of production into a series of apparently 
independent stages, causes an important distinction in form, 
although it does not affect the essence of the matter. If the 
different stages of one and the same production process were 
united in the hand of one and the same undertaker, he would 
not buy any previous product : all previous and intermediate 
products needed would be made, from the beginning, by the 
workers in his employment. Here, therefore, his entire 
" business capital " would evidently be directly devoted to 
advancing subsistence to labourers. As it is, under the 
division of labour, he gets his previous products made by other 
undertakers, and buys them from these other undertakers. 
This amounts to saying that, by this purchase, he takes upon 
himself the burden of the advances hitherto borne by the other 
undertakers, and thus puts them again in a position to take 
upon themselves the burden of advancing subsistence for 
the following period of production. These previous and inter- 
mediate products, then, thus purchased, he gets worked up by 
labourers who are directly in his pay. In this way, there- 
fore, by his wage payments he advances subsistence directly 
to one set of workers, and indirectly by his " outlays " to a 
number of other sets (employed in the preceding stages). 1 

1 It will perhaps be objected that the purchase amounts which the under- 
takers of the previous stages receive contain, not only a simple replacement of 
the advances of subsistence paid by them to workers, but frequently also replace- 
ment of the uses of land consumed, and, in any case, some profit on capital. 
The fact is correct, but it makes no difference in the conclusions which I think 
are to be drawn from what I have said above. The necessity of paying in 
advance for uses of land, the return of which will not be obtained till after long 
methods of production have been completed, has the same effect on the price relation 
between finished present goods and original productive powers, as the necessity of 
paying for labour in advance has. The market for uses of land is only a third 
part-market in addition to the market for credit and the market for labour, where, 
in similar ways, present goods are sold against future goods (see above, p. 313), 
and, consequently, as regards its effects on price, the demand of this market for 
present goods mutually assists, and is assisted by, the demand of the other part- 
markets. This, however, will be made clearer as we go on. Finally, 1 must 
here leave out of consideration the profit of the undertaker, if I would not beg 
the question. Its existence is the result of a certain market condition in the 
subsistence market, and therefore cannot be assumed. It is not because tne 


If, again, the owner lend his wealth to others, it may be 
either for consumption or for production. If the former, the 
sum lent is a direct advance of subsistence to the borrower : 
if the latter, it passes, as already described, from the borrowing 
employer to the labourers, as advance of subsistence. Thus 
the entire accumulated wealth of society — with the very trifling- 
exception of that portion which the owners themselves con- 
sume x — is really brought into the market as supply of advances 
of subsistence. 

But the objection may be raised : How can the entire 
stock of wealth be offered as advances of subsistence when 
that stock consists only partially, and, indeed, to a very small 
extent, of actual means of subsistence, such as food, clothing, 
dwelling-houses, etc., while the great bulk of wealth is 
represented by goods that are not adapted for immediate 
consumption, such as tools, machines, raw T materials, factory 
buildings, and the like ? 

The seeming inconsistency is, however, easily explained ; 
it is simply that men never need their subsistence for the 
entire production period all at once. If, in any community, 
ten millions of men invest their original productive powers, 
Labour and Uses of Land, in an average production period of 
two years, it is quite unnecessary — indeed undesirable — that 
at any one moment the means of subsisting the ten millions 
for the whole two years should be accumulated in finished 
form. It is sufficient if there is enough in finished form for, 
say, one month, and if, in the meantime, the means of subsist- 
ence for the following month are ripening into finished goods. 

profits of the undertaker absorb a part of the available means of subsistence 
that the supply of means of subsistence is so weak as to give them an agio as 
against productive goods. It is because the supply of means of subsistence, even 
without consideration of profit, is insufficient, that these means of subsistence 
receive an agio, and the undertakers who advance them receive a profit. More- 
over it is easily seen that, by eliminating profit from the argument with which I 
started in the text, I do not make it any easier to reach the final result, that of 
giving a reason for the agio on means of subsistence, but make it more difficult. 
That is to say, if, as I assume, the whole stock of means of subsistence is dis- 
posable for the granting of advances to labourers, it will be more difficult in any 
case for this more ample supply to be exceeded by the demand, than if a portion 
of the supply appears to be already hypothecated to profit. 

1 The much more important matter of the consumption of the income from 
capital does not belong to the present question : as was shown in last note it is 
only a result of the supply of wealth being insufficient as against the demand. 



In other words, all that is needed is that previous labour 
should have provided so many goods — partly ready for con- 
sumption, partly in the intermediate form of products ripening 
.successively into consumption goods — as will cover the sub- 
sistence needs of two years, and thereby make it possible 
for the workers to invest their current labour in methods of 
production that will turn out the finished product in two years. 

Here we come to the second part of our threefold proposi- 
tion. The entire wealth of the economical community serves 
as subsistence fund, or advances fund, and, from this, society 
draws its subsistence during the period of production customary 
in the community. All goods which appear to-day as the 
stock or parent wealth of society, so far as they are not already 
consumption goods, will, in the more or less near future, after 
a certain addition of finishing labour, ripen into consumption 
goods, and will consequently cover, for a more or less lengthy 
time to come, the people's demand for consumption. Of course 
this must not be understood as if there were some sharp line 
of division separating the period which is covered by the wealth 
already on hand from that later period which is not yet covered, 
and for which, consequently, provision must be made through 
the current productive powers. What I mean is that the 
stock of wealth projects itself into the future, as provision for 
the consumption of the future, as it were by stages, and not 
all at once. 

It does so in two respects : in respect of the number of 
classes of goods for which provision is made, and in respect 
of the degree of maturity at which the work of production 
stands in the present. As regards the first; it is to be noted 
that, for technical reasons, in many classes of goods {e.g. in 
various foods) provision is limited to the near future, perhaps 
to a couple of months, while, simultaneously, in other classes of 
goods, provision may be made for a couple of years. In others, 
again, where permanence is aimed at, or goods must be got 
ready long in advance {e.g. in dwelling-houses, mining products, 
machinery, and the like), the means of provision must be prepared 
perhaps twenty or fifty or even a hundred years before. Thus, 
then, it is in the nature of things that goods required in the im- 
mediate future must now be ready or almost ready ; for goods 
needed later, it is enough if, at the moment, they have gone 


through, perhaps, half of the production process; while, for goods 
required still later, it may be enough if their production should 
have just begun. If a commodity, for instance, requires five 
years to make, then, in the year 1888, the goods of this class 
destined to be used in the year 1889 must be ready, perhaps 
to the extent of four-fifths; those to be used in 1890 to the 
extent of three-fifths ; those to be used in 1891 to the extent 
of two-fifths ; while, as regards goods destined for the service 
of the year 1892, it is enough if, at the moment, they have 
gone through the first fifth of their total production process. 

Thus it comes that the stock of wealth existing at the 
moment makes provision for the future in a doubly decreasing 
ratio : in proportion as the time of consumption is remote 
there are fewer classes, and the goods in these classes are less 
advanced or mature. To get an adequate representation of 
the circumstances of provision, then, we should have to suppose 
that the stock of wealth existing on 1 st January 1 8 8 8 1 con- 
tains T ^j of the goods required during 1888 and those goods 
are, on the average, y 9 ^ finished, so that, on the whole, the 
labour required for the needs of 1888 is already finished and 
incorporated in the existing wealth to the extent of T 8 ^j : that, 
further, it contains -^ of the goods required during the year 
1889 y 7 ^ finished, thus incorporating y 5 ^ of the labour 
required for 1889: that it contains -y% of the goods wanted 
for 1890 y 4 ^ finished, thus incorporating y 2 ^ of the labour 
required for 1890, and so on for 1891, 1892, 1893, incor- 
porating respectively y 1 ^, y^, and y^ of the total labour 
required for the service of these years. Adding up these 
amounts we come to the result which I wished to elucidate 
by this illustration ; viz., that the entire existing stock of 
wealth provides in advance for something like two years' 2 
demand of the population, with this peculiarity that the stock 
of wealth, instead of covering the exigencies of two continuous 
years, covers successively a decreasing portion of the exigencies 
of a greater number of calendar years. 

Now the way in which this provision is made by the 
existing wealth, and the extent to which it is made, exercise 

1 The figures are, of course, only chosen for illustration. 
2 0-81+0-56 + 0-24 + 0-12 + 0-06 + 0-04 + . . . 


a very suggestive and important influence on the employment 
of the original productive powers, labour and uses of land, 
coming into operation in the current year. For simplicity's 
sake we shall consider the former only in detail. If the stock 
of wealth in existence in 1888 covers the want of the 
current year to the extent of ^j, it is clear that from the 
labour of this year the other ^ will first be covered. But it 
is as certain that the remainder of the current labour will not 
be devoted to the service of the year 1888, and that for two 
reasons: (1) that any return in the year 1888 could only 
be obtained by an unremunerative hand-to-mouth method of 
production, and (2) that the few products thus obtained would 
come upon a market already stocked and find poor sale and 
poor prices. The other ^j of the labour of the year will, 
therefore, be directed to the service of later years. And here, 
again, the following is clear : the fewer the wants of 1889 
covered by the existing stock of wealth, the greater will be 
the amount of the current year's labour directed to the service 
of the year 1889 — if there is not to be a gap in the provision 
from year to year — and the smaller will be the amount of 
labour directed to the service of the years that come after it. 
Conversely if the wants of 1889 are already (relatively speak- 
ing) amply covered by the stock of wealth, only a small 
fraction of the current labour will go to the service of 1889, 
and a proportionally greater amount can be reserved for 
remoter periods. 1 The current labour thus adapts itself 
naturally to the existing stock of wealth. The one begins 
where the other ends. If it were to begin sooner, and so 
duplicate the provision already existent, it would come under 
the doable disadvantage, already mentioned, of overstocked 
markets and less productive methods of production ; and if it 
were to begin later, there would be a gap in the provision 
which would immediately cause scarcity prices, and thus call 
out speedy assistance from the productive powers. 

1 It would be erroneous to assume that, after the demand of the current year 
is covered, the current labour must be directed to the demand of the next 
annual period till such time as this is fully covered; that, e.g., if ^ of the 
demand of 1889 is covered by existing wealth, the labour of 1888 must, or even 
might, immediately prepare the remaining -£$. But in 1888 the maturing of 
finished products is carried forward only one stage, and is itself fully terminated 
only in the year 1889 by an addition of the labour of 1389. 


Thus it is — and here we come to the last part of our 
threefold proposition — that, in reasonable economic speculation, 
the current productive powers will and must, on the average, 
be directed to remote productive purposes (or, in other words, 
invested in longer production periods), in proportion to the 
length of time for which the existing stock of wealth is able 
to provide. If the accumulated wealth is so small that it 
only provides subsistence for one year, it is perfectly clear 
that it is impossible to invest the current productive powers 
in processes that average three years, since, in the interval 
that must elapse between the consumption of the old wealth 
and the production of the new, the people would starve. And 
it is equally clear that it would be, in the highest degree, 
foolish and uneconomic to make the production period shorter 
than the existing wealth allows. The average period of pro- 1 , 
duction in a community is in exact correspondence with the! 
amount of its stock of wealth, and is entirely conditioned 

The principle is clear, but one not unimportant question of 
figures still remains to be considered : What is the numerical 
ratio between the amount of a nation's wealth and the average 
production period which that wealth limits ? 

At the first glance one would be inclined to answer ; — 
the average production period may be just so many months 
or years as there is months' or years' provision in the accu- 
mulated wealth. If, for instance, the year's wants of a nation 
are five hundred millions, and the nation's wealth contains 
goods to the value of a thousand millions, we should be 
inclined to say that the average production period would be 
two years. 

This answer, however, would be incorrect : or, to put it 
more exactly, it would only be correct under conditions which 
do not actually occur in practical life. It would only be 
correct, that is to say, if the work of production was not 
carried on by stages. If production were so arranged that 
all the workers co-operating generally in the manufacture of 
a finished product were employed simultaneously in the same 
stage — I mean if all the workers were to begin with the first 
and preliminary processes simultaneously ; were then to pass on 
simultaneously, as it were in line, to the second, third, fourth 


stage, till, in the end, they simultaneously turned out the 
total product finished and completed, — then, of course, the 
community's wealth must contain, in the form of finished goods, 
enough to supply the wants of just as many years as there are 
years in the production period. Suppose, for instance, that the 
manufacture of clothing were so arranged that all the workers 
employed in it prepared the wool in the first year, built 
machinery in the second, spun yarn in the third, wove it in 
the fourth, and made up the cloth in the fifth, the stock of 
wealth would require to contain finished provision for the 
entire demand of all the workers during five years. For, 
under a division of labour of this kind, during all the five 
years there would be no addition of finished goods to the 
original finished stock. 

It is quite different if production is arranged in stages, 
as it actually is in modern industry. Of the workers occupied 
in the production of clothing — to continue our illustration 
— various groups are employed simultaneously at various 
stages of it. In each year a fifth part of them, perhaps, will 
produce wool, another fifth make machinery, another spin, 
another weave, and another do the making up. 1 The result 
is that, during the five years that elapse between the growing 
of the wool and the making of the coat, additions are succes- 
sively made to the fruits of labour which constituted the stock 
of wealth at the beginning of the period : that is to say, other 
fruits of labour, the results of labour expended at later periods, 
are arriving at the stage of finished goods. Say, for instance, 
that on 1st January 1888 a group of labourers begin the 
manufacture of woollen clothing. Nothing of the fruits of 
this labour will be ready before 1st January 1893. On the 
other hand, besides the wholly or partially finished products 
contained in the inventory of 1st January 1888, the following 
goods will arrive at maturity before 1st January 1893 ; — viz. 
the fruits of one year's labour of those workers who are busy 
with the final stage in 1888 ; of two years' labour of those 
busy with the second last stage in 1888 and with the last 

1 It is all the same as regards the effect whether the same persons perform 
the labour of all stages of production successively, or whether — as is the case 
under the division of labour — certain persons remain constantly occupied in one 
and the same stage. 


stage in 1889; of three years' labour of those who in 1888 
reach the third last and in 1890 the last stage of production ; 
and, finally, the fruits of four years' labour of those who, in 
1888, are occupied with the second stage, and will reach the 
final stage in 1891. Now since these goods, thus successively 
maturing, would provide for a very considerable portion of the 
subsistence needed for the five years 1888-92, it is evidently 
not necessary that the community, before entering on a five 
years' production period, should have a stock of wealth equal 
to the entire five years' needs. Or, if there is such a stock, a 
longer process than five years can be entered on. 

If we look at the same thing from another side, and one 
perhaps better suited to illustration, it is clear that, where 
workers are employed in stages, subsistence need be pro- 
vided five years in advance only for those who work on the 
lowest or earliest stage of the production. The workers on 
the second stage, the fruit of whose labour matures after 
four years, require subsistence advanced them only for four 
years. The workers on the third and fourth stage require sub- 
sistence only for three and two years respectively. The workers 
on the last stage, those whose products will be finished in a 
year, require advances only for a year. Striking the average, 
we may say that, to allow the entire body of labourers to 
embark on a five years' production process, all that is required 
is subsistence for £±A±3±_2±X — 3 years, or a little more than 
half the period of production. 

What is true of a five years' process is true for all periods. 
If we take the trouble of calculating a number of concrete 
examples, 1 we very easily come to an exact statement of the 
law relating to it as follows. The stock of wealth must be 
sufficient for half the production period, plus half the usual 
stage period. If, for example, the work of production is 
carried on only by yearly stages — that is to say, if finished 
products are turned out by the process in question only at 
intervals of one year — then, in a five years' production period 
such as we have been discussing, the stock of wealth must last 
for half the production period {i.e. for 2^ years), and, beyond 
that, for half what we have called the "stage period" {i.e. for 
half a year) ; in all, three years. If again the stages of 
1 Not to cumber the text I have done this in Appendix. 


production are monthly, so that every month there is an out- 
put of finished products, the stock of wealth need only he 
such as will last 2^ years -f \ month. To put it in general terms 
we may say : If the production period embraces x stage 
periods the stock of wealth must always be sufficient for ^-+ 1 
stage periods. 

Obviously, the greater x is, the smaller is the difference 
between this exact formula and the rough expression of 
" half the production period " ; while x again increases with 
the length of the production period and the subdivision of 
the stages. In a two years' process where goods are turned 
out once a year, the production period embraces two stages : 
the value of the exact expression is, therefore, ^}p-= 1^ years 
— that is, fully 50% higher than the rough expression. If, 
again, the process takes five years, and the goods come forward 
by monthly stages, x = 60, and the exact expression has the 
value ^-=30^ months, which shows very little difference 
from " half the production period " of .1\ years. And if the 
production period be ten years, and the output be a weekly 
one, x will equal 520, and the exact expression will have the 
value of 260^ weeks, which practically coincides with the 
rough expression of " half the production period." Now since, 
in any organised industrial community, the average process is 
pretty long, and the subdivision into stages very minute — for 
not a day passes but finished products are turned out of some 
workshop or other — it may be assumed without much error 
that a community may, on the average, engage in production 
processes which are twice as long as the period for which the 
accumulated stock of wealth would provide subsistence. 1 

1 Of course many productions are, for technical reasons, very little divided 
up into stages; agriculture, e.g., yielding its harvests only from year to ytar. 
All the same the ahove formula will be found to give an approximately correct 
presentation of the case, and we may be the better pleased with it that I do 
not intend to draw a single deduction in which anything depends on definite 
figures. What I have to do with is rather the mere negative recognition, that 
the period of time, for which the accumulated subsistence fund must contain 
provision, need not be so great as the average economical production period. 




subsistence market — (continued) 

It may be thought that in the disquisition of last chapter 
we have wandered entirely from our subject, the subsistence 
market. This, however, is not the case. We are here, indeed, 
at the very centre of the question, for we are speaking directly 
of those things which form and regulate the supply and 
demand on the subsistence market. Who are the people that 
require to get subsistence advanced them ? The answer is : 
Every one who wishes to produce in capitalist methods. 1 How 
much is required ? — An amount proportioned to the length of 
the production process. And in what form is it required ? — 
By instalments. Again, who are the people that have subsist- 
ence to give ? — All owners of wealth who do not consume 
but " save " it. How much can they give ? — As much as their 
stock of wealth contains. And in what form can they give 
it ? — Similarly, in instalments — in the proportion that the 
unfinished goods contained in their inventory successively 
mature. This is the true nature of what occurs in our market 
for means of production and in our market for credit — over 
which, I admit, the division of labour and the use of money 
throw a veil very difficult to penetrate. 

Now at what price will finished present goods be exchanged 

1 I repeat again that it is quite true that, during the period of the national 
production process, the idle capitalists and rentiers also must be maintained by 
advances of wealth, and, indeed, as a rule maintained at a pretty fair rate. Their 
claims on subsistence, however, are not causes but effects of the condition of the 
market creating an agio on present goods. If there is no agio, and so no interest, 
then no one could live in idleness as a rentier ; he would either have to work or 
positively consume his parent wealth. See above, p. 320 in note. 


for future goods on the subsistence market ? This is the 
question in which our whole interest peculiarly centres. To 
answer it we must describe, with more care than hitherto, 
both the extent and, in particular, the intensity of supply and 
demand. To begin with Supply. 1 

The extent of the supply of subsistence we have already 
gone into with sufficient exactness. It is represented by the 
total stock of wealth accumulated in a community, exclusive 
of land, and after deduction of those amounts which are con- 
sumed partly by owners who are getting poorer, partly by 
owners producing independently and spending either on 
themselves or by way of advances. 

As to the intensity of supply, it may be assumed from 
what was said on p. 315 as regards modern economic 
circumstances, that, to the capitalists, the subjective use value 
of present goods is not greater than that of future goods. In 
the most unfavourable case, then, they would be willing to 
give almost 20 s. present money for 20 s. obtainable in two 
years, or, what is the same thing, for one week of labour which 
would bring them in 20 s. in two years. 2 

Over and against this supply of present goods stands, as 
Demand : — 

l7 An enormous number of wage -earners who cannot 
employ their labour remuneratively by working on their own 
account, and are accordingly, as a body, inclined and ready to 
sell the future product of their labour for a considerably less 
amount of present goods. Recurring to the figures of our 
illustration on p. 313 we may assume that, for the future 
product of 20s. value — the product turned out complete as 
the result of a week's work, and valued after two years at 
20s. — one class of the labourers will, in the most unfavourable 
circumstances, accept a price or wage of 10s., while another 
class will accept as low a sum as 5s. in present money. 

1 It is scarcely necessary to note that we have now changed the names of the 
parties who enter the market. So long as we were considering the special rela- 
tions of the labour market, we thought of labour as the commodity offered, and 
of the means of subsistence as the equivalent price Now, conversely, the means 
of subsistence appear as the commodity looking for a market, or as Supply. 

2 Never, of course, quite 20s. ; otherwise they would have no advantage from 
the exchange, and consequently no motive to conclude it ; but, perhaps, 19s. 6d. 
or 19s. 9d.— a difference so insignificant that it may be entirely neglected in our 


2. A number of independent producers, themselves work- 
ing, who by an advance of present goods are put in a position 
to prolong their process, and thus increase the productiveness 
of their personal labour, say, from 20s. to 24s. per week. 
Since these persons, obviously, get an advantage from this 
advance so long as it enables them to obtain anything over 
20 s. a week, they will be prepared, where necessary, to give 
up a portion of the surplus product of 4s. a week, as agio on 
the present goods to which they owe this surplus product. 
I purposely here mention only those undertakers who demand 
productive credit for the assistance of their own labour, and 
not those who demand it for the employment of workers 
auxiliary to themselves. The demand of these latter forms 
only a passing stage : they take some part of the supply, pro- 
vided by the owners of wealth, out of the market, but only 
to offer it again, on a different part-market, to the auxiliary 

3. A small number of persons who, on account of urgent 
personal wants, seek credit for purposes of consumption, and 
are also ready to pay an agio for present goods. 1 

Here then we see that, in these groups constituting the 
demand, the circumstances are such that those who demand 
are willing and are able to pay for the present goods they 
require, where necessary, by a larger sum of future goods ; that 
is to say, by an agio. This being the state of the case, then, 
that all who own the supply value present and future goods 
alike, and all who form the demand value present goods higher 
than future, the determination of the price simply depends on 
which side has the numerical preponderance. If more present 
goods are offered than are desired by the united demand there 
can be no interest. The resultant market price, as we know, 
must always be lower than the subjective valuation of those 
would-be sellers who do not effect a sale. Now if the demand 

1 I might name, as a fourth group of demand, those landowners who live, 
not on the return of their labour but on their rents, and who, like the labourers, 
get the price of a future commodity sold by them — in this case the productive 
good, use of land — advanced them in the form of subsistence. I intentionally, 
however, make no mention here of this group of demand since there need not be 
in every economy landowners living on their rents, and since, in any case, the 
emergence of interest which we have to prove in the text is quite independent of 
the simultaneous existence of rent from land. 


is, numerically, too weak, and if, in consequence, all the present 
goods offered cannot find a sale, and if all capitalists — even 
those who cannot find a sale for their present goods — value 
20s. present money at something like 20s. future money, the 
market price of twenty present shillings cannot be higher 
than twenty future shillings, and there is no agio on present 
goods. If, on the contrary, more present goods are wanted 
than are offered, all the suitors cannot be supplied. In 
methods with which we are familiar the weeding-out process 
of competition now ensues ; those who are able to offer the 
highest agio for present goods succeed in effecting an exchange ; 
while the others, be they few or many, are shut out, even 
although they may have been ready to offer some (smaller) 
agio. But since the market price must always be higher 
than that bid by the excluded buyers, and since this latter 
contains an agio, it is clear that, in the circumstances, the 
market price also must contain an agio — great or small — for 
present goods. 

Now it can be shown — and with this we come to the 
goal of our long inquiry — that the^upply of present goods 
must be numerically less than the demand. The supply, 
even in the richest nation, is limited by the amount of the 
people's wealth at tne moment. The demand, on the other 
hand, is practically infinite : it continues at least so long as 
the return to production goes on increasing with the extension 
of the production process, and that is a limit which, even in 
the richest nation, lies far beyond the amount of wealth 
possessed at the moment. 

Where a people, as in the case of Koscher's poor fisher- 
folk, live from hand to mouth, it goes without saying that 
they will be eager to acquire the first hardly saved stocks 
which allow them to make boats and nets, and their exchanges 
will be made with an agio against future goods. But among 
comfortably-off and wealthy people the position is different, not 
in kind, but in degree. If the stock of wealth be sufficient 
to maintain the population during an average one year's 
production period, every one will wish to engage in a two 
years' process with its greater productiveness, and, the stock 
of wealth not being sufficient to advance subsistence to every- 
body for two years, there will be, as before, bidding against 


each other ; the circle of suitors will be weeded out ; and the 
agio on present goods will appear. Nor does it make any 
difference if the community's wealth is sufficient for an average 
of five or ten years' production period. Since the provision 
for human wants would be still more abundant if, instead 
of five or ten years, six or eleven years were the average 
periods, men will always wish to embark on these more 
fruitful methods, will compete to obtain the subsistence that 
is not sufficient for all, and will thereby inevitably call forth 
an agio for present goods. 

Interest and Agio must appear. Assume for a moment 
that they do not. Present goods and future goods are 
exchanged on the great subsistence market at par, and the 
labourers, for the week's work, get the whole value of their 
future product paid down to them in present goods. Say 
that the average production period, assuming the nation to be 
enormously wealthy, is ten years : that the week's work con- 
sequently yields 40 s. and that the labourer receives the whole 
of this as wage. "What will happen ? The undertaker who 
employs people to work with him in a ten years' process makes 
no profit outside of his own personal labour. For the 40s., which 
the labour of his people yields him at the end of the produc- 
tion period, has already been wholly expended as wage. But 
how if he extends the production period still further ? If the 
week's labour has returned 40 s. in the ten years' process, 
experience tells us it will return more in a twelve years' 
process, say 44s. In still longer processes, say, fifteen years, 
it may return perhaps 48 s. Now as the undertaker, by 
hypothesis, can buy present goods at par on the subsistence 
market, it would be foolish of him not to extend the produc- 
tion period for himself and his employes to fifteen years. If 
he does so, he pays his workers out of the borrowed advances 
40s., the price on the labour market : in fifteen years he 
recovers 48s. from the product: from that sum he pays back 
the advanced 40 s. at par, and has remaining the respectable 
profit of 8s. out of each week of labour. And with this we 
have the " surplus value," the profit on capital. 

To prevent its appearance the labourer's wage would have 
to be raised from 40s. to 48s. But this is not possible. 
For the well-known levelling tendencies of competition do not 


allow wages to rise permanently in any isolated branch — so 
long as it does not presuppose peculiar personal qualities — 
inasmuch as there will at once be a rush from less paying 
branches into any particularly paying branch. But neither 
is a general rise of wages to 48s. possible, because the existent 
stock of wealth is only sufficient for an average ten years' 
period. The extension of the process to fifteen years, conse- 
quently, can occur only in isolated cases ; the bulk of pro- 
ductive employments must continue the ten years' process 
which yields only 40 s. per week, and cannot, therefore, permit 
of any higher wage than 40 s. 

On the other hand, it is obvious that something else will 
make its appearance. However sharp undertaker A may be 
in borrowing money free of interest, and securing a nice 
surplus value of 8s. per week of labour, undertakers B, C, D 
and E will not be far behind. The desire to prolong the 
production period, and, with that, the demand for increased 
advances of subsistence, will become general : it will not be 
possible to supply this increased demand from the limited 
funds of subsistence : and, finally, the weeding out of com- 
petition will begin among the classes who constitute the 
demand. Here, then, we have the agio agaiu appearing in 
the universal market price of present goods, from which, by 
hypothesis, we had for the moment banished it. 

And this result, as regards the normal and really economic 
provision of society, is no less healthy than it is necessary. 
The possibility of obtaining means of subsistence free of agio 
would be certain to tempt undertakers into immoderate ex- 
tension of the production period. If this were to occur only 
partially and in a few branches of production, naturally the 
limited stocks of subsistence would leave so much less for 
the other branches of production ; these latter would have to 
curtail their processes unnaturally ; and there would ensue a 
deficiency in the social provision which would outweigh the 
increased return got from the favoured branches through the 
immoderate extension of their processes. 1 But if the excessive 

1 The deficiency is greater, because it is well confirmed by experience that 
the surplus return constantly tends to decrease as the production period is 
extended. (See abov«, p. 84.) The difference between the return which can 
be obtained in a five years', and that which can be obtained in a ten years' 


extension were to be introduced all over, the community's 
stock of subsistence would come to an end sooner than the 
fruits of processes thus unduly extended could mature ; there 
would be deficiency in provision, want, and distress ; famine 
prices would recall the misdirected natural powers, and put 
them, with difficulty, to supply provision for the moment. All 
this could not happen without serious disturbance, expense, 
and loss. 

Now the constant presence of the agio on present goods 
is like a self-acting drag on the tendency to extend the pro- 
duction period ; without checking it all at once it makes it 
more difficult, and more difficult in proportion to the projected; 
length of the process. Extensions which would be harmful as 
regards social provision are thus made economically impossible. 
Moderate extensions over the average process, however, are 
not absolutely prevented, but are limited to those branches 
where, from peculiar economic or technical circumstances, the 
productiveness that goes with the extension of the period is 
so great that they can bear the progressive burden of the 
agio. Branches, again, where longer processes are somewhat, 
but only a little, more productive, are tempted to escape the 
burden of agio by recurring to periods under the average. 
Thus, finally, under the influence of the agio, the total fund of 
subsistence is divided out automatically among the individual 
branches of production, in such amounts that each branch 
adopts that length of process which — in the given condition 
of the fund — is most favourable to the total provision. 1 

production period, is greater than the difference between the returns of a ten 
and a fifteen years' period. If now, in a community where the stock of wealth 
is such as to allow of an average ten years' period, one branch is forced to limit 
its own period to five years because another branch has extended its period to 
fifteen years, the greater difference is lost to the community, and the lesser one 
is won. The total result of such a procedure is, therefore, uneconomic. 

1 The fact that the agio stands at a certain height may now and then lead 
to the appearance of there being a deficiency in remunerative opportunities of 
employment, and a "glut of capital." The truth is that there is always a 
surplus of remunerative opportunities of employment, and a deficiency of 
capital ; only that the high agio, which is the result of the deficiency of capital, 
excludes a mass of remunerative opportunities as not remunerative enough 
economically. It is exactly the same as when, in a year of bad crops, sufficient j 
buyers cannot at the moment be found in some one market for the strongly 
appreciated grain, on account of the price being so high. It cannot be truly 
said that there is a surplus of grain and a deficiency of demand ; on the contrary, 


At this point I think we may congratulate ourselves on 
having finished one of the most important demonstrations in 
the scope of our present task. It fully confirms those infer- 
ences which we had drawn from the nature of the productive 
instrument Labour as a future commodity, and it gives us the 
key to the explanation of the much-disputed " Surplus Value " 
of the undertakers. It shows that, in the great combined 
subsistence market of society, present goods must have an 
agio, as legitimate consequence of the constant fact that 
present goods are more useful, and are more desired, than 
future goods, and that they are never present and offered in 
unlimited abundance. This agio, thus organically necessary, is 
given directly on the loan market in the shape of interest, 
while, on the labour market, it is given in the form of a 
price for labour which remains under the amount of the 
future product of labour, and which, on that account, leaves 
room for the accretion of a surplus value. 

The same principles as regulate the price of the productive 
instrument, Labour, regulate the price of the original productive 
instrument " Nature," or those services rendered by the earth 
which possess an economical character — generally called, from 
their chief representative, Uses of Land (Bodennutzungen). If a 
piece of land — after deducting the share of the complementary 
productive goods which co-operate — will produce in one year 
100 bushels of corn, or will rear in five years 100 cwts. of beef, 
no one would be willing to pay the par value of 100 present 
bushels of corn or 100 present cwts. of beef for the use of the 
land, when these last-named amounts, employed in lengthening 
the production process, or directly exchanged against future 
goods on the loan market, or spent in buying labour, could 
obtain more than the 100 future bushels or cwts. Thus Uses 
of Land, when exchanged against present goods, cannot escape 
a deduction in price any more than can the productive good 

And, finally, on exactly similar grounds the very same is 
true of the price of Intermediate Products. Concrete capital 

there is so great a deficiency of grain that, after the weeding out which has 
resulted from the war of competition, only a very small part of the demand 
finds, economically, admittance to the scanty stocks. 


generally — raw materials, tools, and so on — is bought and sold 
at a price which remains under the amount of the future 
product resulting from it. It would be a very easy matter to 
prove this point by point, as we did with the price of labour, 
but the case of intermediate products is so closely allied that 
it seems to me quite unnecessary. 

Speaking generally, the importance of the demonstration 
we have just completed does not consist in its proving that 
productive instruments are bought at a price which remains 
under the price of their future product, for this is an old and 
familiar fact taught not only by daily experience but by the 
theory of the most diverging schools. The really important 
result of our investigations is, that this well-known fact has 
been shown to be the necessary outcome of the same causes as 
give present goods the superiority in value over future goods. 

A few chapters back I assented to one feature of the Socialist 
interest theory — that which explains surplus value from the low 
price at which productive powers are purchased I may now 
add wherein the theory is wrong. It is wrong, first, in ex- 
plaining interest by the cheap purchase of labour only. Interest 
is got as much by the cheap purchase of uses of land. 
Quantitatively, of course, the profit from buying labour bulks 
much more largely in importance. The profit from the 
"cheap" purchase of intermediate products need not be 
mentioned here; it is explained on the same principles as 
the profit from the purchase of the original productive powers. 

Second, as I have already said on p. 301, the purchase is not 
so cheap as it seems to be, because the object of purchase is 
measured in (undervalued) future goods, while the price is 
measured in (full- valued) present goods. 

And, finally, the fact that the price of labour is relatively 
low, is not the naked result of an exploitation in which want 
forces the labourers to acquiesce. To some extent, although, 
probably, to a less extent, the same would be the case without 
any compulsion, if wealth were divided almost equally among 
all. To prove this let us recur for a moment to the considera- 
tion of those primitive circumstances which I hurried over as 
not immediately appropriate to modern economy. 1 Suppose a 
society where all are owners of wealth, and all independent 

1 See above, pp. 316, 317. 



producers. Their labour, embodied in, say, a two years' process, 
is moderatively productive. Suppose that, in this society — 
which is not a poor one — a certain producer possesses means 
enough to make it possible for him, either to maintain himself 
for six years, or to maintain himself and one worker for three 
years. The product of a year's labour, we shall suppose, is as 
follows: — in a two years' production period £52 (at 20s. per 
week), in a three years' process £60, in a six years', £65. x If 
this man employs his wealth in lengthening the period of his 
production without employing an assistant, he obtains by his 
six years' labour 6x65=£390. If he employs an assistant, 
and works along with him in a three years' process, he reaps 
from his own labour in six years 6 x 60 =£360, while the 
same amount is produced by the labour of. his employ^. How 
much can he pay this employe in wages ? 

Obviously it is quite impossible to give him the full £360 
(that is £60 per year) in wage, for this would be to inflict 
positive injury on himself. Working by himself he would 
have obtained in six years £390 ; by employing another he 
gets only £360. To avoid loss he must, therefore, keep back 
of the product of the employe' at least £30, and thus he will 
be able to pay him at most £330, or £55 per year. If he 
does so, the whole advantage of the business is, obviously, still 
on the side of the labourer. The undertaker gains nothing, 
but the labourer gains, inasmuch as he now earns £55 
instead of the £52, which is all he could have earned as an 
independent undertaker with a two years' process. In these 
circumstances the idea of exploitation is out of the question : 
so is the idea of a forced agreement: and still the wage, 
although stretched in favour of the labourer to the extremest 
limit of the economically possible, remains under the full 
amount of his future product. Surely this is a clear enough 
proof that there is some other reason for the " cheap " buying 
of labour than compulsion and exploitation ! 

1 I assume that the figures of the return in a six years' period are a little, but 
not very much higher than those in a three years', in harmony with the experi- 
ence, so often alluded to, that gradual extension of the production period tends 
to always decreasing surplus returns. 



Material goods are of use to mankind through the action of 
the natural powers that reside in them, or, as I have expressed 
it in another place, through the rendering of their material 
services. On the nature and importance of these material 
services I have said enough in my former work, 1 and I shall 
repeat only a few considerations which seem necessary to 
connect what was then said with the subject now before us. 

Many goods are so constituted technically as to be capable 
of rendering one single service, and in that service to exhaust 
the whole of their useful content. These are what we call 
Perishable goods. In them the good and the service coincide. 
Many other goods, again, are able to render several successive 
services. We call these Durable goods : tools, dwellings, 
clothes, land are instances of such. Here the single service 
forms a smaller economical unit clearly distinguished from 
the good itself, and is capable of obtaining a certain economical 
independence. To afford a single and limited act of satis- 
faction, a single service may be detached from the useful 
content of the good. Various services of the same good 
may be independently and differently disposed of. Single 
services, or groups of services, may be independently trans- 
ferred, gifted, or sold to different people, as we see every day 
in the familiar legal contracts of Lease and Hire. Such 
services may obtain an independent price, and, as this of 
course presupposes, an independent value. 2 It is the value of 
these material services that now claims our attention. 

1 Capital and, Interest, p. 219. Also Rechte und Verhdltnisse, p. 57. 

2 Are Material Services themselves "Goods" ? — Many writers will have it so, 


This value cannot be subject to any other laws than those 
which regulate the value of goods in general. A service 
obtains value exactly as a good does — that is, by the satisfac- 

as Hermann (Staatsvrirthschaftliche Untermchungen, second edition, p. 109), or 

Menger {Grundsdtze, p. 132). Other recent writers, like Sax (Chundlegung, 

p. 209) and R. Meyer (Das Wesen dcs Einkommens, pp. 155, 168), emphatically 

exclude the services themselves from the conception of Goods. (Sax speaks 

primarily of personal services, but what is true of them must logically be true 

of material services. ) To my mind the matter appears to stand as follows. First 

of all, the whole question is not one of scientific knowledge, but simply one of 

terminology. And provided that the nature and the place of material services 

in economics were really and properly recognised, in the end it would not much 

matter whether the name Good was attached to them or not. Those authors 

who refuse to recognise material services as goods appear to me, however, to 

have some notions that are not really and properly correct. Thus Meyer (pp. 

156, 157, note 4) denies to material services the character of economic means, 

and explains them rather as "satisfactions of want." Now the material service, 

as I understand it, is a real mean towards the satisfaction of want, not that 

satisfaction of want itself. It stands as independent intermediary between the 

good from which it comes, and the satisfaction of want which it is intended to 

cause but does not by any means always cause. If, e.g., I hire an oven for the 

baking of bread— that is to say, bay its use or its material service — what kind of 

thing is it I really have bought ? Have I directly bought the satisfaction of 

want, the allaying of hunger? — Certainly not. Or the oven itself? — No. Or, 

perhaps, the bread that is to be made by the oven ? — Again, no. But what I 

have bought is just one material service, or group of services, of the good called 

Oven ; these services are means to the production of bread, and thus, beyond that, 

to the satisfaction of one of the needs of subsistence. The material services are, 

therefore, true and — according to the sense indicated in the text — independent 

economical instruments and objects. — If now, with the view of settling the 

terminological question, we inquire as to the position of the material services 

among the other economical instruments, we seem to arrive at the following. 

There can be no doubt as to the inventory of the causes of wellbeing, — the causes 

which we summon to the satisfaction of our wants. Our wellbeing is furthered, 

on the one side, by persons who are useful to us (such as teachers, guardians, 

clergymen, artists, workers, domestics, etc.), and, on the other side, by useful 

things. And the use of both comes to us through the exertion of their useful 

powers, — that is, through useful services. In the sphere of material instruments 

of wellbeing we treat both the things and their services as economical objects : in 

the sphere of personal instruments of wellbeing, since the abolition of slavery, 

we do not treat the useful persons themselves, but only their services, as 

economical objects. Thus the scheme of our economical means of satisfaction 

would receive something like the following shape : 

Economical Means of Satisfaction 

(Useful Persons) Material Goods 

Personal Services Material Services 

And now it is a question of appropriate terminology to which of these categoried 
the name "Good" should be attached. Personally I believe that the science 
has great need of one short expression which would embrace all kinds of means of 


tion of some want being dependent upon it — and the amount 
of its value is measured by the importance of the dependent 
want — that is, by the amount of the marginal utility which 
may be obtained from a service of such kind and such extent. 

Thus there is, naturally, an intimate relation between the 
value possessed by the material good itself, and the value 
possessed by its services. The nature of this relation scarcely 
requires explanation ; — a material good obviously has the 
same value as the sum of all its services. If a good is capable 
of rendering ten services, and if the satisfaction of a certain 
want depends on each of these services, it is obvious that wha t 
depends on the possession of the good is the receiving of these 
satisfactions, and, indeed, of all the ten satisfactions from 
which the services get their value. 

Naturally the case of perishable goods is the simplest. 
Here the value of the single service coincides purely and 
simply with the value of the good itself. The value of the 
service rendered me by a cartridge is identical with the value 
of the cartridge. The case of durable goods is more compli- 
cated. We have always to think of the value of a durable 
good as a compound amount ; as made up of the importance 
of more or less numerous wants to which it ministers by its 
successive services ; or — to put it another way — as made up 
of the individual values of the services on which those satisfac- 
tions depend. If a farmer is calculating the use value of a 
threshing-machine with a view to buying it, he will take into 
account the time the machine will last and the work it is 
capable of doing, and will calculate from that how many 
services it will render, and how much each service will be 
worth to him. 1 

satisfaction. Now, since the word "good" is quite suitable for this purpose, and 
has already long been used for this purpose, I see no reason why it should now 
be deposed. Of course there is quite as strong a need to keep the material services 
in their turn separate from the material goods which bear these services. But 
this can be done, both simply and sufficiently, by instituting the distinction, inside 
the universal conception of the "Good," between "Material Goods" and "Material 
Services." — Things like Rights, Relations, Properties, would, for good reasons, 
find no room even in the widened conception. 

1 The perception of the above is made very difficult by the usual method of 
valuation according to "Costs" which, naturally, is always directed to the unit 
of goods as a whole (see my Rechle und VcrhaMnissc, p. 64, note 1). The reader, 
however, who has followed our conception of what the nature of the law of costs 


In this, however, there may be another complication. If the 
services of the durable good be exhausted in a short space of 
time, the individual services, provided they are of the same 
quality — which, for simplicity's sake, we assume — are, as a 
rule, equal in value, and the value of the material good itself 
is obtained by multiplying the value of one service by the 
number of services of which the good is capable. But in the 
case of many durable goods, such as ships, machinery, furniture, 
land, the services rendered extend over long periods, and the 
result is that the later services cannot be rendered, or at least 
cannot be rendered in a normal economic way, before a long 
time has expired. 

As consequence, the value of the more distant material 
services suffers the same fate as the value of future goods. A 
material service, which, technically, is exactly the same as a 
service of this year, but which cannot be rendered before next 
year, is worth a little less than this year's service ; another 
similar service, but obtainable only after two years, is, again, 
a little less valuable, and so on ,• the value of the remote 
services decreasing with the remoteness of the period at which 
they can be rendered. Say that this year's service is worth 
100., then next year's service — assuming a difference of 5% 
per annum — is worth in to-day's valuation only 95'23 ; the 
third year's service is worth only 90'70 ; the fourth year's 
service, 8 6 '3 8 ; the fifth, sixth, seventh year's services, respect- 
ively, worth 82-27, 78'35, 74*62 of present money. The value 
of the durable good in this case is not found by multiplying 
the value of the current service by the total number of services, 
but is represented by a sum of services decreasing in value. 
If the current year's use of a machine is worth 100, and the 
machine is capable of doing work of equal quality for five years 

is, and has, consequently, recognised that, even where goods seem to get their 
value from their costs, the utility of the goods always stands in the background as 
the true source of value, and that, in any case, the " costs " must always be in 
harmony with the — independently established — marginal utility of the goods, will 
not be misled by any appearance to the contrary. Even in the consideration, for 
instance, of whether a durable good in general is worth its cost, and whether, 
consequently, we should produce or buy it, we must form an opinion to ourselves 
as to its utility, and I should be puzzled to know how this opinion is to be 
formed if not on the basis of the value which the material services of the good — 
singly and taken together — have for us. — On the whole question treated in the 
text see also my Rechte und VerhaUnisse, pp. 61-68. 


more, the machine is not worth 6 x 100 = 600, but 100 + 96 - 23 
+ 90-70 + 86-38 + 82-27 + 78-35 = 532-93. 1 Now what 
happens during the working life of this machine ? — In the first 
year of its use the owner realises the " current " service with 
its value of 100. Naturally this service, thus consumed or 
rendered, comes off the value of the machine (which we may 
call the " bearer of the use "), and the good suffers a loss of 
value. But this loss of value cannot be quite so great as the 
value of the service rendered and deducted. It is partly com- 
pensated by the increased value of the services that still remain 
embodied in the machine. That particular service which, at 
the beginning of the year of use, figured as " next year's," and 
had a value of only 95-23 in present money, figures by the 
end of the year as "this year's use"; it has advanced one year 
nearer maturity and grown into the full present value of 100. 
Similarly the former third year's service has now become next 
year's, and its value has grown from 90'70to95-23: the fourth, 
fifth, and sixth year's services have passed into the rank and 
value of third, fourth, and fifth year's services. Behind each 
of these latter services there remains another service ready to 
take its place, and entirely supply it. It is only the last, the 
sixth year's service, that is not replaced by any succeeding one. 
And thus we find that the loss of value which the durable good \ 

1 These figures are based on the assumption that the whole year's utility is 
obtained all at once, and, indeed, obtained in anticipation at the beginning of 
the year ; e.g. by hiring the good at a year's interest of 100 payable on each 
1st January. If, on the other hand, the year's use can only be had at the end 
of the year, a valuation undertaken at the beginning of the year will show figures 
not inconsiderably lower. That is to say, on 1st January 1888, the present year's 
use which will be obtained only by 31st December, — that is, practically, a whole 
year later,— will not be valued at the full 100, but at 95 23 only ; and again the 
" next year's use," that obtainable 31st December 1889, — that is, practically, two 
years later, — will be valued at 9070, and so on. Now this shows, for the whole 
good, a sum of value of 95 -23 + 90 70 + 86 -38 + 82 -27 + 78 -35 + 74 -62 = 507 -55. If, 
finally, the utility were always obtainable in the middle of the year, or, what 
comes to the same thing, were to be spread equally over the whole year, the 
figures would be — for a valuation taken on the 1st January — 97 "56 + 92 '85 + 88 "38 
+ 84-12 + 80-07 + 76-21 = 519-19.— That the figures should alter according as the 
date of the valuation stands nearer or farther from the date of obtaining the 
utility, is an entirely natural thing, and one quite familiar in financial life. 
The value of paper — which is just a "durable good" with annual uses — always 
stands a little higher shortly before the interest or dividend terms than some time 
before. I may note that the above figures are taken as before from Spitzer's 
Tables, and are based on an interest rate of 5%. 


suffers during the year's use turns out exactly equal to the 
initial value of the most remote service inherent in the good. 
This value, of course, is less than the value of the present 
service, the service known as the " current return " : and 
thus it happens again that, to the owner of the durable good, 
something of the current return always remains over as net 
profit or net interest, after deducting the loss of value which 
the good suffers during its year of use (that loss of value 
familiarly known as " wear and tear "). This " something " 
amounts exactly to the customary percentage of the total value 
(the " capital value ") of the parent good, the bearer of the 
utility — a coincidence which it is the easiest thing in the world 
to explain. For this " something " is got from the increasing 
value of the total services of the goods as these services come 
nearer to the present. Now, naturally, each service increases 
in value as it comes nearer the time of its realisation in the 
same ratio as it was underestimated formerly by reason of its 
remoteness : that is to say, it increases in value by the usual 
market percentage on its individual value. But since, as we 
saw, the sum of the individual values of all the services inherent 
in a good constitutes the value of that good, the increment of 
value of all the services added together must be exactly equal 
to the usual market percentage on the total value of the good. 
To put all this into figures. At the beginning of the first 
year of its use the good, as bearer of six annual services, was 
worth in present value 100 + 95-23 + 90*70 + 86-38 + 82-27 
+ 78-35; that is, 532 - 93. At the end of the first year, as 
now capable of five annual services of the present value of 
100 + 95-23 + 90-70 + 86-38 + 82-27, it is worth 454-58. 
The loss in value is, therefore, 7 8 - 35, which is exactly the 
same as the former most remote service was. But since the 
sum received from the current years service — the value of 
the service sold and now deducted — amounted to 100, there 
remains a net gain of 21*65, which is exactly h°/ o of 432*93, 
the sum which the good became worth immediately on deduc- 
tion of the first service realised, as one might say, to account. 1 

1 On the part return of 100, which was separated off from the good on the 
first day of the year, the good naturally will no longer yield any interest. If, on 
the other hand, the year's utility is only obtainable at the end of the year, it 
must naturally pay interest on the full initial value of the bearer of the utility, 
as will be brought out somewhat more fully later on. 


Similarly, in the second year's use, the owner again realises 
the service now become present and worth 100. This comes 
off the value of the parent good. But the succeeding service, 
which before had become worth 95*23, now arrives at the full 
value of 100: that succeeding it, becomes worth 9 5 '2 3, and so 
on. Only the last service, that originally worth 8 2 -27, finds 
nothing to replace it. At the end of the second year's use, 
then, the good, as capable of four remaining annual services of 
the individual values of 100 + 95-23 + 90*70 + 86-38, is worth 
372-31. As against the value of 454'58 which it had at the 
beginning of the year, it has suffered a loss of value of 82*27 
which is equal to the value of what was the last service ; and 
as against the receipt of 100, it returns 17*53 net, the interest 
on the somewhat reduced capital 1 that remains. And thus it 
goes on from year to year, the gross return always remaining 
the same (because by hypothesis the amounts of service remain 
unchanged in technical quality), the quota for wear and tear 
always increasing (because the marginal service, that which 
determines the loss of value, stands nearer to the present, and 
so to the full present value), and the net interest always de- 
creasing (in correspondence with the decrease of the capital, 
owing to wear and tear, on which interest has to be paid), till 
finally the good has entirely given up its useful content and is, 
as we say, consumed. 

Put in general terms, then, we get the following very l 
simple explanation of the phenomenon of interest on durable 
goods. The owner of a durable good can always realise 
the full (higher) value of the then present utility, and this 
represents the " gross return " of the good, its " gross interest." 
He loses, on the other hand, on account of the steady 
advance of the more remote services towards the present, only 
the smaller value of the last service then inherent in the 
good. This smaller value determines the amount of the 
" wear and tear," and thus there is always a difference between 
gross interest and the amount of wear and tear, which differ- 
ence forms his net profit or net interest. The cause, then, to 
which net interest owes its existence, is nothing else than an 

1 Of 354 "58, because again the 100 taken off at the beginning of the year— 
which may independently obtain interest — need no longer obtain interest through 
the good. 


increase of value of the future services — services which were 
previously of less value, but during the period of the good's use 
have pressed forward into or towards the present. 1 

Thus our theory traces back the profit which durable goods 
yield their owner to the selfsame causes as explain interest on 
loans and undertakers' profit on production. I think I am 
justified in claiming this as the peculiar merit of the theory, 
and, at the same time, as a strong proof of its correctness. 
For it was just this interest on durable goods (Nutzungsgiiter) 
that formed the stone of stumbling to all earlier interest 
theories, and stood, as it were, a standing contradiction of them. 
Supposing that the other kinds of interest could be explained 
by the productivity of capital, obviously this was no explana- 
tion of the interest yielded by a durable consumption good 
which produced nothing, such as a dwelling-house, household 
furniture, a hired piano, the books of a lending library. Or, 
if undertakers' profit was traced, with more or less appearance 
of justification, to an exploitation of the labourers, the ques- 
tion remained : What labourers are exploited by the owner of 
a house ? Suppose he has paid away the whole £2000, the 
worth of his house, in wages to the labourers who built it, so 
that in the origin of the house there is not a particle of profit 
from exploitation : still, the house, year after year, yields him 
£100 of interest on capital. Where shall we find the worker 
from whom the £100 could have been taken either by fraud 
or force ? 

The " Use theory " appears, at first sight at least, better 

1 If the year's service can be obtained only at the year's end, the figures of 
the valuation, and with them the figures of the interest, will be altered, but the 
principle of the process, and, in particular, the reduction of value by the amount 
of the then last service, remains unchanged. I shall put together in the follow- 
ing tables the course of the value movement for one such case. The initial value 
of a good which will last six years, and has an annual utility, obtainable at the 
end of the year, of 100, is, as stated above (p. 343 in note), equal to 95-23 + 
9070 + 86-38 + 82-27 + 78"35 + 74-62 = 507 '55. 

Value on 

Value on 


Wear and 


1st Jan. 

31st Deo. 



Net Int 



432 93 

















272 31 

















able to account for this form of interest, since it borrows its 
special foundation directly from the phenomenon of the durable 
use of non-perishable goods. 1 But neither does it get beyond 
the mere semblance of an explanation. It gets entangled in 
subtleties of a " wider " and a " narrower " use, of a " gross " 
and a " net " utility, — terms, by the way, which may be quite 
proper as convenient expressions to indicate certain pheno- 
mena, but represent anything but clear and definite conceptions 
— and leaves entirely unexplained the nature of the relations 
existing between the value of the net and the value of the 
gross use, between the value of the parent good and the 
amount of its wear and tear. Whether net interest is high 
because the value of the capital is high, or whether capital 
value is high because net interest is high ; whether the amount 
of gross interest is cause or effect of the value of the other 
two amounts — on these questions we should seek in vain, 
in the writings of Hermann, Knies, or Schaffie, for anything 
approaching to clearness of inquiry and for anything like 
a real explanation. To all these questions our theory gives 
one concise answer. The value of material services (Gross 
Use) forms the first link in the causal chain. The value of 
the " bearer of the use," the parent good, is the sum of the 
individual values of its material services. "Wear and tear is a 
result of the diminution of the services which still reside in 
the good, and is, on account of the progression in time of the 
later services, neither equal to the value of the material service 
detached during the year of use, nor yet corresponding to the 
degree of physical wear and tear 2 (which, if the good last six 

1 See Capital and Interest, p. 194, and particularly p. 233. 

2 A very noteworthy fact, which theory up till now has left entirely without 
notice and entirely without explanation. I have already called attention 
to it in rny book Rechte und Verhdltnisse, p. 68, note 6. As to the actual 
fact that the successive diminution of value, which a good suffers in the course of 
its wear and tear, does not go parallel with the degree of its physical wear and 
tear, but is slower at the beginning and quicker as time goes on, there can be no 
doubt. It may be seen in its purest form, because there it is not confused through 
subjective inexactnesses or caprice, in the rating of valuable paper which brings in 
a fixed annual amount for a limited number of years. A bond, e.g., which assures 
its owner the right of drawing ten years' coupons of £1000, and possesses (on 
a calculation of 5% compound interest) an initial course value of £7722 (Spitzer's 
Tables, p. 274), does not lose £772*2 for each of the ten years which make up 
its lifetime, although in each of these years it loses exactly one-tenth of its 
content. In the first year it loses £614, in the second £645, in the third £677, 


years, would amount yearly to one-sixth of the whole uselul 
content), but is equal only to the value of that service which 
is the last, the most remote, at the time of calculation. And 
it is this same progression in time which causes the increase 
in value of the later services and from which comes a net gain, 
the interest on capital. 

The same considerations that have elucidated the cause of 
interest from durable goods throw a strong light on another 
phenomenon, equally familiar and equally misunderstood, — that 
of Capitalisation. It is a well-known circumstance that, to 
such goods as yield us a more or less permanent return, we 
ascribe a certain " capital value " in consideration of this 
return. We estimate them as equal to a money capital which, 
at the ruling rate of interest in the particular country, would 
yield a similar amount of return for the same period. Thus a 
house which returns £500 a year, we value at £10,000 if the 
usual rate of interest is b/ Q , or at £12,500 if the rate is 
±°/ Q ; or we value a machine which, for six years, throws off 
annually a gross amount of £100 and certain net decreasing 
amounts, at something over £500. 

Why do we attach just this value to them ? The com- 
mon explanation is : Because these goods yield a certain net 
return we must hold them equal in value to a sum of money 
which yields just the same net return. This, however, is 
incorrect, or rather it is not an explanation at all but a 
reasoning in a circle. The existence of a net return is not the 
primary fact which can be given as cause of the parent good 
having a definite value, but, conversely, a definite value must 
already be put on the good if this net return as such is to 
appear. If, in our example, the machine, which in six years 
returns in all £600, had been valued at £600, its whole 
return evidently would have been absorbed by the " wear and 

and so on successively £710, £747, £783, £823, £864, £907, and, finally, in the 
tenth year, £952, the sum it was still worth at the beginning of this latter year. 
But in all other kinds of durable goods the same course of wear and tear may be 
observed with sufficient accuracy, although, for obvious reasons, we seldom make 
so exact and mathematical a calculation. Later on I shall have another occasion 
to mention cases of this kind. Now in all the literature known to me I have 
found no attempt to give an explanation of this fact, — which is certainly notable 
enough to deserve explanation. Indeed, such an explanation is simply not to be 
got from the machinery of previous theories, particularly the " Use theory," while 
it offers itself unsolicited on the lines of my theory. 

chap, vii CAPITALISATION 349 

tear," and there would have been nothing left over as net 
return. It is simply because it was valued at less, at some- 
thing only a little over £500, that there remains a net interest 
after deducting the quota for wear and tear. And it is exactly 
the same, as I shall show farther on in another connection, as 
regards the return and capital value of houses, lands, etc. 

The only correct conception, and the only conception which 
really gives an explanation of the phenomenon, is the one now 
stated. The true primary fact is the lower value of future 
goods and future services : next we have the parent good, as 
capable of containing future services, estimated at a less 
amount than the total value which the services successively 
given off will represent as they are given off: and finally, as 
consequence, comes the fact that the capitalised sum is less 
than the sum of the amounts realised by the services in the 
course of time, and that there is a net surplus from the current 
return. That, on the one hand, the value of the bearer of 
the use, and, on the other, its net return, are represented 
by such figures that the former may be held equivalent to -a 
money capital yielding, at the current rate of interest, exactly 
the same net return, is a coincidence which I have already 
explained. 1 And, in virtue of this coincidence, it is, finally, as 
intelligible as it is justifiable that, in practical economic life 
which finds and adopts, as facts ready to its hand, the things 
which we try to explain, the net return of goods should be 
taken as foundation for acts of valuation. It is an abbreviated 
method which, practically, is quite appropriate, although it 
turns the relation of cause and effect exactly the other way. 2 

1 See above, p. 343. 

2 In Menger's most valuable contribution Zur TJieorie des Kapitales (Conrad's 
Jahrbiicher, vol. xvii. p. 47), which appeared while this was passing through 
the press, the author likewise has urged against the Use theory that, in its 
conception of capitalisation, it has not solved its problems, but only gone 
round about them. 



To proceed. The phenomenon of interest just explained is 
characteristic of all durable goods, consumption and production 
goods alike. But, in the case of production goods, there comes 
in one circumstance the influence of which has to be investi- 
gated. In goods which are to serve as instruments of production, 
not only are the future services remote from the present, but 
both the present and the future services are remote from that 
economical goal which is first to be reached through production. 
The final destination from which, according to principles with 
which we are now familiar, they derive their value, is the 
product obtainable from them x in the future. But from the 
attainment of this goal the current service — even that service 
in the very act of realisation — is distant by the whole produc- 
tion period which must intervene between its incorporation 
in the process and the turning out of the finished product. If 
this period, for instance, amounts to two years, the current 
service is two years away from attaining its goal, and at the 
same time from attaining its full present value : the next year's 
service is three years away, the next again four years, and so 
on ; while, in the case of durable consumption goods, every 
service attains its full present value in the year, or in the 
moment it is rendered. Now this has a twofold result : first, 
the services of productive goods undergo a greater reduction as 
compared with their full final value, and, second, the growth 
of their value lasts longer on that account. After they are 
produced and set to work, they bear interest during the whole 

1 After deducting the share of the co-operating complementary factors. 


period of the production process on which they enter ; only, 
in practice, this interest is ascribed, not to the durable good 
that forms an integral part of the " outlay " — from which, 
indeed, it is now separated — but to the " business " or " circu- 
lating" capital into which it is transferred at the moment of 
its separation. 

To illustrate this. A durable consumption good which 
lasts six years, and yields at the end of each year a use 1 of 
100, is worth, as we have seen, 95-23 + 90-70 + 86-38 + 82-27 
+ 78*35 + 74*62 = 507*55. 2 A durable productive good, on 
the other hand, which lasts six years, and whose year's use 
affords a final utility of 100 after a further production period 
of two years, has the following value. Its " current " year's 
use, which is first obtained by the end of the year, and then 
brings in the amount of 100 after two years more (that is, 
after three years in all), is only worth in present valuation 
86*38. Its next year's use, which will bring 100 in four 
years, is to-day worth 82-27. Similarly the third year's use 
has a present value of 78*35, the fourth year's, a value of 74-62, 
the fifth, a value of 7l - 06, and, finally, the sixth has a value 
of 67*68. The whole productive good, accordingly, has a value 
of 46036. 

At the end of the first year's use the first service is 
detached ; this, meanwhile, has come nearer to its final goal 
by a year, and accordingly advances in value from 8 6 -3 8 to 
90'70 ; the other services follow suit in the usual way. Thus 
the good, as still bearer of five prospective services of the 
individual values of 86*38 + 82*27 + 78*35 + 74*62 + 71*06, 
is now worth in all 392-68. It has therefore lost 67*68 
in the course of the year's use, and, as against the return of 
90 - 70 represented by the service detached, has borne 2 3 -02 
of interest — exactly 5% on the initial value of 460*36. So 

1 Here I must assume that the utility is not obtained in advance, but at 
the expiry of the particular period, because in the case of durable productive 
goods employed in a personal undertaking — with which the comparison is to be 
made — there is, in the nature of things, no anticipative use. The utility, e.g., 
which an agricultural implement affords in farming, cannot possibly be obtained 
on 1st January, for the whole year in advance : obviously it can be realised only 
at the end of the year, in the harvest. 

2 P. 343, note 1. At a different interest rate, of course, the figures would be 


far everything runs as before. But the service which was 
separated off, with the value of 90*70, neither remains in its 
former shape nor retains its former value. It is detached 
from the fixed capital, and has passed over into the circulating 
capital, where it remains incorporated in some or other of 
the intermediate products, say, in the yarn spun by the 
machines. In this new shape it is the object of the further 
production process, and is by it brought step by step nearer 
to full maturity, and so to its future value of 100. This 
it attains in the following — the second — year of use. 

At the end of the second year's use again, the service, 
which is now the current one, is detached from the parent 
good with a value of 90*70 : the parent good, now valued at 
321*62, has lost 71*06, and, as against the return of 90*70, 
has borne 19*64 as interest. But during this same year, the 
service detached in the previous year and incorporated in the 
circulating capital, has risen from 90*70 to 95*23 in value, 
and bears another 4*53 of interest. And, again, in the same 
way at the end of the third year of use, a service of the then 
value of 90*70 is detached, by which the parent good loses 
74*62 in value, and interest gains 16*08. But since 
simultaneously the service detached two years before, and 
incorporated in the circulating capital, increases from 95*23 
to its full value of 100, and that detached one year before, 
from 90*70 to 95*23, there is a further gain in interest of 
4*77 + 4*52; that is, of 9*30. 

In this way the peculiar combination of circumstances in 
durable productive goods gives occasion to a twofold interest 
relation. The services already detached bear interest after 
the manner, and as integral part, of the circulating capital ; 
that is, their claim or title to interest is based on their trans- 
formation into finished and final product. The services still 
contained in the good bear interest after the manner of 
durable consumption goods ; that is, their claim is based 
simply on their approximation to the present. But, of these 
two elements of the interest return, only the second is formally 
ascribed to the parent good from which it springs : for it the 
calculation is concluded at the moment in which the individual 
service is detached, and with the value which it then has. 
What further happens with it is ascribed to the circulating 


capital into which it passes at the moment of its separation. 1 
And thus we come to the final result : All interest borne by- 
durable productive goods is borne by them simply in their 
character of durable goods, while their second property, that 
of being productive, only comes into play in the interest borne 
by the services already detached and transferred to eirculat-\ 
ing capital. In this lies the complete explanation of a 
developed interest phenomenon, which I before suggested but 
had to delay going fully into until now. 2 

There is still, however, another highly important explana- 
tion we may gather in passing. 

In goods capable of only a moderate number of services 
the contraction of value, even in the case of the last services, 
is but small. The result of this is, on the one hand, that the 
value of the parent good is only a little behind the gradually 
developing value of its collective services — in our first example 
the value of the machine lasting six years was not quite 600, 
but still it was over 500 ; and, on the other hand, that the 
amount of wear and tear, even in the first year, 3 is relatively 
high, and almost equal to the entire value of the current 
service — in our illustration the value of the current service 
was 100, the value of the last service, that which decides the 
Wear and tear, about 78. 

In goods, again, capable of a very long series of services, 
both the value of the parent good and the amount of wear 
and tear fall proportionately. A good capable of rendering- 
services of the annual value of 100 for 100 years, is very far 
from being valued at 100x100 = 10, 000. At most (where 
the usual under-valuation of future goods is at the rate of 

e> v 

1 This is most clearly shown when the intermediate product made by the 
assistance of the durable good — e.g. the cotton yarn spun by a machine — is 
immediately sold to another undertaker by whom the process is completed, and 
the yarn made into thread or cloth. All increment of value which the inter- 
mediate product, the yarn, thus obtains, is now naturally put to the account of 
this particular intermediate product (or the money capital for which it is sold) 
and not to that of the parent durable good. 

2 See above, p. 305. 

3 In the later years the "wear and tear" increases progressively, because the 
last service, which is not replaceable by any one coming after it, gets always 
nearer to the present, and becomes, therefore, always higher in value. See above, 
particularly the table on p. 346, note 1. 

2 A 


5%) it is worth 2000 ; and the loss of value in the course of 
the first year's use — although a service worth 100 has been 
consumed and detached from the use-content of the good — 
is, not 100 but '76, that and. no more being the present value 
(at a discount rate of b°/ o per annum) of a sum of 100 falling- 
due in 1 years ! 1 

Finally, if a good is capable of rendering not only a great 
many, but, practically, an infinite number of services, the 
phenomenon just mentioned is seen in full development : the 
present value of the parent good is infinitely less than the 
successively increasing value of its services. A piece of land, 
for instance, which bears £100 each year for an infinite series 
of years, is worth, not 100 times infinity, not £100,000, not 
even £10,000, but only some £2000, and its loss of value 
sinks to zero : the piece of land whose annual current service 
is worth £100, yields the ivhole £100 net. The law remains 
just as before ; but the very remote services of the second, 
third, tenth century, have so exceedingly small a value in the 
present that they can add almost nothing to the present value 
of the land, and the last service, the one which should decide 
the amount of depreciation, as infinitely far away, has no 
present value at all. 

This is the ultimate reason why rent of land appears as 
a net income, and here first is the solution of the problem 
of rent traced to its real issue. The old rent theory gave 
only a preliminary and partial answer, and, strangely enough, 
had not the slightest suspicion that its tentative solutions 
had never come near the heart of the problem. All preced- 
ing attempts, from Ricardo downwards, exhausted themselves 
in more or less successfully pointing out that the annual 
uses of land have an economic value, or yield an economic 
return, and why they do so. But the yield of such, services 
is in itself, first of all, a gross return. That the owner gets 
a net return, a net income, has nothing to do with fruitful- 
ness, situation, kind of ground, or any such thing, but simply 
with the lower value put upon future goods, and the deter- 
mination of the present value of the land in conformity with 
that. Suppose that a quarry, after deduction of all other 
recognised costs, produced for a hundred years a — what we 

1 Spitzer's Tables, p. 121. 


may call — net annual return of £100; and suppose that 
future services were not less valued than present ; the value 
of the quarry would be the full amount, 100 x 100. The 
quarry -owner would draw an annual income of £100, but 
not a shilling of that would be " rent " in the present sense 
of that term, that is to say, a net income. The whole of 
it would be a protracted consumption of the parent wealth of 
£10,000. And the case of all other lands is different from 
that of the quarry, not in kind, but only in degree. If a field 
is considered capable of producing crop for 1000 years — or 
2000 years if one should prefer it, for literal infinity in 
human affairs is out of court — and if the future crops are to 
be valued as highly as the present ones, the valuation put 
upon such a field will reach an exorbitant height, viz. 
£100,000 or £200,000, and the yearly rent of £100 will pre- 
sent the character of a breaking-off of the parent stem of wealth 
— a very gradual destruction of the stem, but still a destruc- 
tion, not a net income. Landowners would be lords of a 
giant stem or stock of wealth, but they would have no net 

The theoretical explanation of rent from land, then, coin- 
cides ultimately with the explanation of interest obtained 
from durable concrete capital, a nd land rent is nothing but a 
s pecial case of interest obtained from durable go ods. That the 
two explanations do not entirely coincide, and that, on the 
contrary, the current rent theories are substantially so very 
different from the interest theories, is only traceable to the 
fact that, in the course of the explanation of rent, an inter- 
calation had to be made which did not require to be made in 
the case of interest on durable capital ; and that, at the same 
time, from a faulty conception of the rent problem, economists 
exhausted the whole content of the rent theories in making 
this special intercalation. In the case of all products of 
labour, and, consequently, in all goods that constitute 
capital, it needs no explanation that they and their material 
services have economic value : were it not so they would not 
be produced. In the case of the services of land, on the 
other hand, this is not self-evident. And, therefore, the 
economist must first exert himself to show why and under 
what circumstances the use of land receives a value and a 


price. With a correct value theory, a few strokes of a pen 
will supply this proof ; — by means of the doctrines of marginal 
utility and of complementary goods. Wanting the guidance 
of such a theory, and entangled in the fetters of the labour 
value theory, economists gave it a shape which was un- 
necessarily circumstantial and clumsy, and was, at the same 
time, not very satisfactory in principle. Of Eicardo's rent 
theory, which in essence has remained the ruling one up till 
the present day — the theories of his opponents Carey and 
Eodbertus being quite exploded — it must be said that it 
contains an abundance of truth put in a formula essentially 
false. It is a brilliant piece of casuistry, which is out of 
connection with the central fire of correct principles ; it 
lights up a bit of the road, but leaves the rest in obscurity 
and error. Hence the peculiar fate of the Eicardian theory. 
It does not quite satisfy anybody. Even its friends are fain to 
discover a number of weak points in it, and its most universal 
propositions are, for the most part, its weakest. But there 
remains in it an indestructible core of truth, which lives on 
under the most varied metamorphoses, and, even to-day, con- 
stitutes the better part of its substance. 1 

But how far does the Eicardian, or any other rent theory, 
take us, even if it were correct in every point where it is 
disputable ? It takes us no further than we get in the question 
of interest, when it has been shown that a threshing-machine, 
after deducting all other costs, yields an annual gross interest, 
and why it does so. Where Eicardo ends his rent theory, 
there in truth ends the intercalation, which, because of its 
obviousness, did not require to be made in the case of mov- 
able capital. But it is just then that the chief question of 
the problem suggests itself: why there is a net interest 
within that gross interest which is yielded by the year's 
use or service of the threshing-machine or the field, after 
deduction of all other costs. And to this question — which 
the rent theory up till now has entirely omitted to put — 
no answer can be given, either as regards the field or the 

1 On the relation of Ricardo's rent theory to the modern value theory, see 
Dr. James Bonar's suggestive remarks in an article entitled "The Austrian 
economists and their view of value" in the Quarterly Journal of Economics, 
October 1SS8. 


machine, but to point to the under -valuation of future goods 
and future services. 1 

1 Manifestly the fact that Rent of Land and Rent of Capital have one common 
final cause is not a sufficient reason for abolishing every distinction between 
them. Between land and capital there are so many important differences, 
both theoretical and practical, that, notwithstanding the common feature just 
described, we are justified in adhering to tbe decision made in a former chapter 
to keep land out of the conception of capital. — Quite lately Carl Menger, in 
Conrad's Jahrbiicher, vol. xvii. p. 48, has ably put forward the necessity of a 
comprehensive "universal theory of the return to wealth." I trust that, in 
the contents of the present chapter, he will see an earnest attempt to develop 
such a theory. 



"We have traced all kinds and methods of acquiring interest 
to one identical source — the increasing value of future goods 
as they ripen into present goods. Thus it is with the profit 
of the undertakers, who transform labour — the future good 
which they purchase — into products for consumption. Thus 
it is with landlords, property-owners, and owners of durable 
goods generally, who allow the later services of the goods they 
possess to gradually mature, and pluck them when they have 
ripened into full value. Thus, finally, it is with the loan. 
Even here it is not the case, as one might easily think 
at first sight, that the enrichment of the capitalist comes 
from the creditor receiving more articles than he gives — 
for at first, indeed, the articles concerned are less in value — 
but from the fact that the loaned objects, at first lower in 
value, gradually increase in value, and on the moment of 
fruition enter into their complete higher present value. 

What, then, are the capitalists as regards the community ? 
— In a word, they are merchants who have present goods to 
selL They are the fortunate possessors of a stock of goods 
which they do not require for the personal needs of the 
moment. They exchange this stock, therefore, into future goods 
of some form or another, and allow these to ripen in their 
hands again into present goods possessing full value. Many 
capitalists make this exchange once for all. One who builds 
a house with his capital, or buys a piece of land, or acquires 
a bond, or gives a loan at interest for fifty years, exchanges 
his present goods, wholly or in part, for goods or services 
which belong to a remote period of time, and consequently 


creates, as it were at a blow, the opportunity or condition of 
a permanent increment of value, and an income called interest 
which will last over this long period. One, again, who dis- 
counts a three months' bill, or enters on a one year's production, 
must frequently repeat the exchange. In three months or in 
one year the future goods thus acquired become full-valued 
•present goods. With these present goods the business begins 
over again ; new bills are bought, new raw material, new 
labour ; these in their turn ripen into present goods, and so 
on again and again. 

In the circumstances, then, it is very easily explained why 
capital bears an " everlasting " interest. We may dismiss any 
idea of an inexhaustible " productive power " in capital, assur- 
ing it eternal fruitfulness, — any idea of an eternal " Use " 
given off, year out year in, to the end of time by a good perhaps 
long perished. 1 It is because the stock of present goods 
is always too low that the conjuncture for their exchange 
against future goods is always favourable. And it is because 
time always stretches forward that the prudently purchased 
future commodity steadily becomes a present commodity, grows 
accordingly into the full value of the present, and permits its 
owner again and again to utilise the always favourable con- 

I do not see that there is anything objectionable in this. 
For natural reasons, present goods are certainly more valuable 

1 The incorrectness of a theory is shown in its not being able to give a satis- 
factory solution for all given cases. I have already had frequent occasion to 
point to cases which could not be satisfactorily explained by means of the — to 
my mind — incorrect " Use theory " (see above, pp. 297, 347). Here I have to 
add another instance ; — the buying of a perpetual interest, e.g. Consols, where the 
original debt can neither be called up nor paid back. In these annual payments 
the Use theory would see the price for a " use of capital " perpetually transferred. 
But what has happened with the capital stock ? It has of course been transferred. 
But it is not simply lent, for it will never be paid back. Nor, in the view oi the 
Use theorists, can it be transferred against payment, for the annual interest is 
the price of the " use," and there is nothing paid beyond that. Nor, finally, 
is it transferred without payment, — presented as a gift : the rentiers, the repre- 
sentatives of those who made the loan, have no intention of making any such 
present, and the government which received the loan certainly does not feel 
that it has received a gift. — Now what the Use theory could not explain, or 
explained only in a most artificial way, is explained perfectly simply by our 
theory : it is just an exchange of present goods (the original capital) against a 
series of future sums of goods (the annual interest payments). 

360 RESULTS book vi 

commodities than future goods. If the owner of the more 
valuable commodity exchange it for a greater quantity of the 
less valuable, there is nothing more objectionable in this than 
that the owner of wheat should exchange a peck of wheat for 
more than a peck of oats or barley, or that a holder of gold 
should exchange a pound of gold for more than a pound of iron 
or copper. For the owner not to realise the higher value of his 
commodity would be an act of unselfishness and charity which 
could not possibly be translated into a general duty, and as 
a fact would not be so translated in regard to any other 

In the essence of interest, then, there is nothing which 
should make it appear in itself unreasonable or unjust. But 
the essence of an institution is one thing, and the circum- 
stances which may accidentally accompany it in its practical 
working out are another. That the community has a power of 
choosing representatives is good ; but if at every election there 
are broken heads, and pot-house agitation and brute force 
instead of patriotic deliberation decide the majority, it is not 
good. And, like every other human institution, interest is 
exposed to the danger of exaggeration, degeneration, abuse ; 
and, perhaps, to a greater extent than most institutions. 

It is undeniable that, in this exchange of present com- 
modities against future, the circumstances are of such a nature 
as to threaten the poor with exploitation of monopolists. 
Present goods are absolutely needed by everybody if people 
are to live. He who has not got them must try to obtain 
them at any price. To produce them on his own account 
is proscribed the poor man by circumstances ; the only kind 
of production he could take up would be one yielding an 
immediate return, and this is not only unremunerative but 
almost impracticable under modern economic conditions. He 
must, then, buy his present goods from those who have them, 
either in the form of a loan, or, more usually, by selling his 
labour. But in this bargain he is doubly handicapped ; first, 
by the position of compulsion under which he finds himself, 
and, second, by the numerical relation existing between buyers 
and sellers of present goods. The capitalists who have pre- 
sent goods for sale are relatively few ; the proletarians who 
must buy them are innumerable. In the market for present 


goods, then, a majority of buyers, who find themselves com- 
pelled to buy, stands opposite a minority of sellers, and this 
is a relation which obviously is profoundly favourable to the 
sellers and unfavourable to the buyers. 

Now, of course, the circumstances unfavourable to buyers 
may be corrected by active competition among sellers. The 
fewer the sellers, the greater are the amounts of present goods 
they have to dispose of To find purchasers for them all, 
competition must bring down the price from extreme heights 
to a moderate level that leaves no room for exploitation of 
poor men. 1 Fortunately, in actual life this is the rule, not 
the exception. But, every now and then, something will 
suspend the capitalists' competition, and then those unfor- 
tunates, whom fate has thrown on a local market ruled 
by monopoly, are delivered over to the discretion of the 
adversary. Hence direct usury, of which the poor borrower 
is only too often the victim ; and hence the low wages forcibly 
exploited from the workers — sometimes the workers of indi- 
vidual factories, sometimes of individual branches of pro- 
duction, sometimes — though happily not often, and only under 
peculiarly unfavourable circumstances — of whole nations. 

It is not my business to put excesses like these, where 
there actually is exploitation, under the aegis of that favour- 
able opinion I pronounced above as to the essence of interest. 
But, on the other hand, I must say with all emphasis, that what 
we might stigmatise as " usury " does not consist in the obtain- 
ing of a gain out of the loan, or out of the buying of labour, 
but in the immoderate extent of that gain. If exchanges are 
to take place between present and future commodities, the 
existence of some gain is an entirely normal phenomenon ; is, 
indeed, an economic necessity. Some gain or profit on capital 
there would be if there were no compulsion on the poor, and 
no monopolising of property ; and some gain there must be. 
It is only the height of this gain where, in particular cases, 
it reaches an excess, that is open to criticism, and, of course, 
the very unequal conditions of wealth in our modern com- 
munities bring us unpleasantly near the danger of exploitation 
and of usurious rates of interest. 

As little, again, will the unbiassed spectator deny that, in 

1 See below on the Rate of Interest. 

362 RESULTS book vi 

the circumstances accompanying the receipt of interest, it is 
frequently the case that one's sense of fairness is offended by 
the contrast between gain and desert. Where capital has 
once been obtained by personal exertion and ability no one 
would grudge its owner the further profit he makes, without 
exertion, by exchanging his hard-won present goods into future 
goods. But often it is just the greatest fortune that falls into 
the lap of its owner without any personal desert on his part, 
simply by the happy chance of a legal enactment giving him 
the preference, and in this case also the lucrative exchange, of 
present goods for future goods which steadily ripen into more 
valuable present goods, is made without exertion and without 
personal deserving. In all other branches of exchange clever 
speculation is needed, timely seizing of opportunities, favourable 
conjunctures, if a gain is to be made by the exchange. But 
the merchant of present goods finds the conjuncture always 
favourable. He need only put out his hand to dispose of his 
goods, with a profit, to any one among the thousands of eager 
buyers, while, by his side, the poor labourer drags out a painful 
existence of heavy toil, at a sacrifice of personal strength and 
personal happiness. 

But what is the conclusion from all this ? Surely that, 
owing to accessory circumstances, interest may be associated 
with a usurious exploitation and with bad ocial conditions ; 
not that, in its innermost essence, it is rotten. And the 
logical conclusion is that the axe should be laid to the decayed 
branches, and not to the sound stem, — just as it would be 
foolish to take away the right of self-representation instead of 
simply putting down the riots at election time. But what if 
these abuses are so inseparably connected with interest that 
they cannot be eradicated, or cannot be quite eradicated ? 
Even then it is by no means certain that the institution 
should be abolished. Arrangements absolutely free from 
drawback are never allotted to us in human affairs. Instead 
of the absolute good, which is beyond reach, we must choose 
what, on the whole, is the relative best, where the balance, 
between attainable advantage and the drawbacks that must 
be taken into the bargain, is the most favourable possible for 
us. Living in a great city has certainly many disadvantages ; 
so has living in a small city ; and so has living in the country. 


But we must live somewhere, and so we make our choice of 
the place where, after wise consideration of all the circum- 
stances, the unavoidable evils seem to be most outweighed by 
the advantages. And in the same way, before we abolish 
interest as such, we must first draw out a balance-sheet to 
show whether human wellbeing is better promoted in a society 
which permits gain from capital and recognises it, or in one 
which permits only income from labour. 

In making this calculation it will n6t be overlooked that 
the institution of interest has its manifold uses ; particularly 
as thep rospect of in s aving and accumulation of 
c apital , and thus, by making possible the adoption of more 
fruitful methods of production, be comes the cau se of a more 
a bundant provisio n f or the whj jle__paople. In this connection 
the much -used and much -abused expression, " Eeward of 
Abstinence," is in its proper place. The existence of interest 
cannot be theoretically explained by it : one cannot hope in 
using it to say anything about the essential nature of interest : 
every one knows how much interest is simply pocketed without 
any " abstinence " that deserves reward. 1 But, just as interest 
sometimes has its injurious accompaniments, so in its train it 
brings others, fortunately, that are beneficent and useful ; and 
to these it is due that interest, which has its origin in quite 
different causes, acts, among other things, as a wage and as an 
inducement to save. I know very well that private saving 
is not the only possible way to the accumulation of capital, and 
that, even in the Socialist state, capital may be accumulated 
and added to. 2 But the fact remains that private accumula- 
tion of capital is a proved fact, while socialist accumulation 
is not ; — and there are, besides, some very serious a priori 
doubts whether it can be. 

Still it is neither my purpose nor my duty to inquire 
what organisation of society on the whole is best, — the present 

1 I gladly embrace this opportunity to repair an omission in my Capital and 
Interest. At the time when I published that work I unfortunately had not 
made the acquaintance of Loria's La Rendita Fondiaria (Mailand, 1880). It con- 
tains (pp. 610-624) an unusually spirited and subtle variation of the Abstinence 
theory, of which I can only say that, if the Abstinence theory were tenable — 
which, of course, I do not believe it to be — Loria's setting of it would be the 
first to gain recognition. 

2 See above, p. 114. 

364 RESULTS book vi 

or the Socialist. I have only here to answer what comes up 
for answer in an inquiry as to the nature and origin of interest. 
And the answer here runs : There is no inherent blot in the 
essential nature of interest. Those, then, who demand its 
abolition may base their demand on certain considerations of 
expediency, but not, as the Socialists do at present, on the 
assertion that this kind of income is essentially unjustifiable. 

Is the abolition of interest, then, possible ? It may, I 
think, not be unprofitable to many of my readers to follow 
the fate of interest in the Socialist state. 




Let us imagine the Socialist state perfectly realised : all 
private property in land and capital abolished; all instruments 
of production vested in the hands of the community ; all 
citizens working as labourers in the service of the common- 
weal ; and the national product distributed to all according to 
work done. How is it now with the action of those causes 
which produced interest under the individualist economy ? 

First of all, it must be made clear that the causes are still 
there. There is always a natural difference of value between 
present and future goods ; and since under Socialism time does 
not stand still, future goods gradually become present ones, 
and bring a surplus value with them. The difference of value 
between present goods and future, I say, is always there. For 
its peculiar causes continue to exist ; — the difference between 
the circumstancec of provision in present and future, the 
partial underestimate of the future which is characteristic of man, 
the uncertainty and shortness of life. In the Socialist state no 
one will be allowed to be an undertaker on his own account, 
and, of course, the consideration of the greater technical pro- 
ductiveness of present goods employed as productive instruments 
ceases to be a motive for individuals : all the more strongly 
does this motive obtain as regards the great economic common- 
wealth which now conducts and guides the total national pro- 

Thus, even for the Socialist state, it is absolutely in- 
conceivable that economi subjects, whether as individuals 
or as the powerful economic commonweal, should, in their 
economic judgment and their economic practice, treat present 


and future goods as on the same footing. How, for instance, 
could it be all the same to the Socialist worker whether 
he received his hard-earned wage by instalments of £1 a 
week, or in £52 at the end of a year, or in the shape, perhaps, 
of £52 five or ten or fifty years later? Or how is it con- 
ceivable that, under Socialism, a young oak sapling which will 
be an oak tree, with the value of an oak tree, in two hundred 
years, can be made equal in value to an oak full-grown now ? 
The central authority directing the national production must 
base its entire arrangements and dispositions on a calculation 
of present and future goods having different values, if its 
dispositions are not to be quite inept and monstrous. If 
it do not put a less value on future goods it must find that 
a process which promises a greater number of products in the 
far future is more remunerative than a process which yields a 
small number in the present or near future, and it must, 
accordingly, always turn its productive powers to remote 
productive ends, however remote they are, as being, technically, 
the most fruitful. The natural consequence would be very 
much as we have already pictured it l — misery and want in 
the present : and those in charge of the national economy 
would have no more pressing duty than to overturn this inept 
disposition, give the less amount of present goods the preference 
over the greater amount of future ones, and so prove that the 
difference in value between present goods and future is an 
elementary economic phenomenon independent of any human 

If it is now clear that, even in the Socialist state, present 
goods will, universally, be valued more highly, it goes without 
saying that, if there is an exchange between the two, it cannot 
be effected at par. Exactly as under the present economic 
organisation, present goods, as more valuable, will claim and 
will receive an agio. The emergence of this agio — and with 
it the emergence of interest in its most legitimate form — 
could only be repressed if every opportunity for' it were 
repressed ; in other words, if the exchange or barter of present 
goods for future were removed out of the world altogether. 

Now, of course, this would be attempted to a considerable 
extent in the Socialist state. All private ownership in the 

1 See above, p. 335. 


means of production being banished, all production on private 
account would be banished also, and all opportunity of buying 
the future commodities, Labour, Uses of Land, and Capital, 
would be taken away from private individuals. Since, then, 
in any case the loan at interest would also be forbidden, the 
two chief springs, from which interest flows to private persons 
in the present day, would be happily stopped up. But certain 
opportunities would still remain open if exchange transactions 
between individuals were not entirely forbidden. Suppose, for 
instance, that free exchange were allowed in durable goods, 
agio and interest would immediately slip in, as it were, by a 
back door. Say that a good lasts one hundred years, and that 
its (present) year's service is worth £100, £10,000 must be 
the price of the good if the hundredth year's service — rendered 
perhaps to some grandchild or great-grandchild — is to be 
paid full £100. No man would be willing to pay this price. 
But the moment that the purchase price is calculated at less 
than £10,000, the owner receives, in course of time, an income 
greater than the purchase price, and harvests the excess as 
true interest. 

But much more important than any such sporadic obtain- 
ing of interest by private individuals is the fact that, in the 
Socialist state, the commonwealth itself, as against the citizens, 
would make use of the principle of interest which to-day it 
reviles as " exploitation " and deduction from the product of 
labour. The Socialist state, as possessing all means of produc- 
tion, gets all the citizens to work in its factories, and pays 
them a wage. It conducts, therefore, on the largest scale the 
buying — forbidden to private individuals — of the future good 
Labour. Now, on technical grounds, various portions of the 
labour it buys it necessarily sets to work simultaneously to- 
wards various productive ends widely removed in point of time. 
One group of labourers, for instance, it sets to baking ; another 
it sets to sink mining shafts, which, perhaps, assist in turn- 
ing out consumption goods only twenty years later ; another 
it sets to replant a forest. The labour directed to distant ends, 
for reasons with which we are now familiar, obtains a greater 
technical product, and that product when ripe will possess also 
a greater value. While, for instance, the product that a baker 
turns out in a day is worth, perhaps, 4s., a labourer engaged in 


forestry may plant one hundred oak saplings in a day, and these 
saplings, without added labour, may mature in a hundred years' 
time to strong oak trees worth 20s. apiece. 

Now how much can and should the Socialist state pay as 
wage to those workers whose labour it directs to these far-away 
but productive ends ? Will it pay the foresters the whole 
value of their future product, say, £100 a day? — Impossible. 
That would be a glaring injustice to the workers of other 
departments: If the entrance to individual branches of employ- 
ment were left free to all comers, everybody would be a forester 
and nobody would bake bread ; the country would relapse to 
primeval forest ; and the present, with its pressing needs, would 
remain unprovided for. 1 If, on the other hand, the entrance 
was not free, and a very favoured minority were to be paid 
£100 a day, while the others received 4s. or 6s., a plutology 
would emerge again in optima forma ; only that it would not 
be based, as now on property, but, more fatally, on favour 
and protection ! 

But if foresters are paid exactly like bakers at 4s. per day, 
they are exploited just as they are by the capitalist undertakers 
under the present system. In buying the future commodity, 
labour, an agio is put on present goods, and the labourer,, 
instead of his future product of £100, is put off with a present 
wage of 4s., which represents the present value of the planted 
saplings. But the surplus value which these saplings take on 
as they grow into oak trees ready for cutting, the Socialist 
commonwealfh puts into its pocket as real interest. Perhaps, 
— probably, it is to be hoped, — not to keep it in its pocket, 
but to employ it in a general bettering of the wages of its 
workers. But any such supplementary common purse distri- 
bution of the interest thus pocketed does not make any differ- 
ence in the fact that interest, as interest, has been received. 
In this the Socialist state only acts like a capitalist in the 
present day, who accumulates a fortune from his surplus values, 

1 It may, perhaps, be pointed out in reply that, owing to the increasing 
supply of wood, its value would be pressed down, and so, by and by, forestry 
would become only as remunerative as baking and such like. I would, however, 
suggest that this result would only be reached when the value of hundred-year- 
old timber had come down to a halfpenny ; and to press down the value of wood 
so low, in tire midst of a dense population, an enormous portion of the country 
would require to be turned into forest again ! 


and then disposes of it for purposes of the general good. A 
wage earned can be disposed of egoistically or altruistically, 
and interest received can be disposed of egoistically or altruis- 
tically, but it would be as rash to assert that a wage becomes 
an interest by being egoistically spent, as to assert that an 
interest changes its nature, and turns into wage, when it is 
altruistically spent ! 

It is, too, well worthy of remark that an equal distribution of 
the interest obtained by the Socialist state does not establish the 
same economic conditions as if the interest had not been taken 
at all. In this distribution it is not the persons to whose labour 
and product the interest was due that get the interest, but en- 
tirely different people. The forester has an amount of £99 : 16s. 
deducted from the value of his future product as interest. If, 
now, through the distribution of all the interests thus obtained, 
the average day's wage is raised from 4s. to 6s. per day, the 
forester gets a couple of shillings returned him of the £99 : 16s. 
taken from him; the remaining £99 : 14s. other people get, 
and get, indeed, just as at present, not by the title of wage, but 
by the title of property, — or rather of joint-property. The 
people who are employed in immediately remunerative produc- 
tion, such as baking, and create a day's product of 4s., could, 
as labourers, ask and receive a wage of only 4s. The other 2s. 
they receive only because they are at the same time joint 
owners in the national wealth, and because the Socialist state, 
which administers the common national wealth, as proprietor 
of this wealth, brings its entire right of property to bear on 
those workers whose labours are directed to more remote pro- 
ductive ends. In the Socialist state, therefore, exactly as in a : 
capitalist society, interest is deserved by the proprietor of 
present goods as against those labourers who create only a 
future product by their labour. The only difference is that in 
the capitalist society property is unequally divided, and interest 
falls to a few proprietors in great amounts, while in the Socialist 
society all are joint owners to an equal amount, and all obtain 
an equally small quota of the total interest. 

In the above analyses I have taken my illustration from 
forestry because it illustrates the circumstances in question in 
the most striking and unambiguous way. In the most striking- 
way, because the difference of time between the forth-putting 

2 B 


of labour and the receiving of the mature product, and, with 
it, the difference in value between labour and future product, 
is at its maximum : in the most unambiguous way, because 
here no additional labour of any sort is necessary, and, conse- 
quently, the calculation of the final product produced by a 
definite expenditure of labour is quite simple. But it surely 
needs no further demonstration that exactly the same relations 
occur, in more or less weakened degree, in the case of all 
labour which is directed to more remote goals of production. 
They are all technically more productive than those which 
yield their results on the moment. Their abundant future 
product, too, must always have a greater future value, because 
it could not, economically, have been produced at all if already 
its present value, reduced by perspective, were not equal to the 
otherwise normal value of a similar amount of labour. 1 Since, 
finally, the wage for similar and similarly valuable labour cannot 
be assessed at different levels according as the Socialist state 
directs its labour to a near or a remote goal of production, the 
wage of those labourers who are put to more remote tasks must, 
necessarily, be measured under the full value of their future 
product, 2 and this secures that, to a greater or less extent, 
there appears a surplus gain for the community which is the 
owner of the present goods. 3 

Nor does it require any demonstration that the phenomenon 
of interest must emerge to a still greater degree if the Socialist 

1 See above, p, 310. 

2 The levelling up of wages — that is, up to the value of the future product of 
the most remuneratively employed labour — is, of course, impossible, because the 
national product would not suffice for that. 

3 I may remark in passing that the same position holds in the case of land 
rent. It is obvious that, even in the Socialist state, a labourer working on a 
peculiarly fruitful piece of land, e.g. in a Rudesheim vineyard, will produce a 
greater or more valuable produce than one who puts forth the same exertion and 
skill on a common piece of land or vineyard. But it is as evident that it would 
be insufferable "protection" to allow the former labourers their entire greater 
product as wage. To avoid injustice the wage here must be levelled down ; that 
is to say, of the product of the more fruitful lands, the " land rent " must be first 
of all retained for the common purse, to be divided afterwards to all the citizens 
in their capacity as joint, owners of the national land. Land rent, therefore, 
even in the Socialist state, would exist, would come into operation as against 
the labourers cultivating superior land, and would only be divided according 
to another plan than now, on account of the equal share of all in the nationalised 


society be organised, not as one united community, but as a 
system of independent economic groups. 1 For in this case, at 
every exchange between mature and immature commodities, 
each group would appropriate surplus value, not only as against 
its own workers employed to remote productive ends, but, in a 
much greater degree, as against the other groups, and would 
divide out this surplus value to the shareholders of the wealth 
belonging to the group, as dividend. 

Thus we come to a very remarkable and noteworthy result. 
Interest, which to-day the Socialists abuse as a gain got by 
exploitation, a robbery from the products of labour, would not 
disappear even in the Socialist state, but would remain, in 
promise and potency, as between the community organised 
under Socialism and its labourers, and must so remain. The 
new organisation of society may make some change in the 
persons who receive it, and in the shares into which it is 
divided, by altering the relations of ownership ; but the fact 
that the owners of present commodities, in exchanging them 
for future commodities, obtain an agio, it neither will nor can 
alter. And here, again, it is shown that interest is not an 
accidental " historico-legal " category, which makes its appear- 
ance only in our individualist and capitalist society, and will 
vanish with it ; but an economic category, which springs from 
elementary economic causes, and therefore, without distinction 
of social organisation and legislation, makes its appearance 
wherever there is an exchange between present and future 
goods. Indeed, even the lonely economy of a Crusoe would 
not be without the basis of the interest phenomenon, the 
increasing value of goods and services preparing for the service 
of the future ; only, of course, that, in the absence of exchange 
transactions, there would be wanting the chief occasion to put 
exact figures on the value of goods, and therewith almost the 
only opportunity of calling attention and giving fixity to the 

1 On these forms of organisation see Anton Menger, Das Hecht auf den vollen 
Arbeitsertrag, Stuttgart, 1888, pp. 104, 112. 






The exchange of present goods for future, in which interest 
has its origin, is only a special case of the exchange of goods 
in general. It goes, then, without saying that the formation 
of price in this case is subject to the same laws as govern 
the formation of price in economical exchange generally. The 
question whether present goods in general obtain an agio, and 
also the further question of the height of that agio, are both to 
be answered according to the rules laid down in Book IV. as 
regards prices of goods in general. What remains for us here 
is only to amplify and vivify the colourless scheme which 
demonstrated that the current price of goods is the resultant 
of subjective valuations coming together in a market, by 
pointing out those concrete circumstances which in this case — 
the exchange of present against future commodities — influence 
the mutual valuation of both. 

As before, it is advisable to distinguish between isolated 
exchange and competitive exchange. 

In the exchange which takes place between an owner of a 
present commodity and a suitor for it, the price, according 
to the formula laid down on p. 199, will be fixed some- 
where between the value of the present good to its owner as 
under limit, and its value to the suitor as upper limit. If, 
for instance, £100 present money are worth to their owner 
exactly as much as £100 of next year's money, 1 while to the 
suitoT they are worth, on subjective grounds (say, on account of 

1 An assumption which, for the reasons shown on p. 315, holds very widely ; 
— that is to say, among all persons who own more wealth than they can or will 
spend in their own productive equipment. 


temporarily pressing circumstances), as much as £200 of next 
year's money, the price of £100 present money will be fixed 
somewhere between £100 and £200 of next year's money, and 
the agio at something between nothing and 100%. The 
precise figure that is fixed, in the individual case, within these 
wide limits, depends on the skill and " staying power " dis- 
played by both parties in conducting the negotiations. As 
a rule, the owner of present goods will be in a position of 
advantage, because he can do without the exchange and yet 
suffer no loss, while the suitor is often driven to pay any price 
for present goods. Hence the familiar cases where, in the 
absence of competition, usuriously high rates of 50%, 100%, 
even 200% and 300%, are extorted. 

When we go farther, and inquire as to the deeper reasons 
which affect the subjective valuation of the suitors, 1 and thus 
affect the economic upper limit of the agio, we find them a 
little different in the case of the consumption loan from what 
they are in the production loan, to which latter the buying of 
labour is closely allied. 

In the case of the consumption loan the determinants are ; 
— the urgency of want at the time, the probable provision 
at the time when the loan is to be paid back, and, finally, the 
degree of the suitor's underestimate of the future. The more 
urgently he requires the loan, the more easily he expects to be 
able to replace it; 2 and the less he takes thought for the morrow, 
the higher the agio to which he will, in the worst case, consent 
and vice versd. 

In the production loan we find different concrete deter- 
minants. Here the important thing is the. difference in pro- 
ductiveness between the methods open to him who gets the 
loan, and those open to him who has to do without it. To 
recur to our old illustration. If the fisher, who has no capital, 
and can catch only 3 fish a day by hand, gets a loan of 
90 fish, and is thus put in a position to make a boat and 
net in the course of a month, and with these to catch 30 fish 

1 as regards the sellers of present goods, for simplicity's sake, we shall adhere 
throughout the argument to the assumption that their personal circumstances are 
such that they value present and future commodities alike. 

2 We may take the case, e.g., of a youth standing on the brink of manhood, 
kept very short of cash at the moment by his tutor, but with the prospect of a 
great fortune coming into his absolute disposal in a few months. 


a day for the remaining eleven montns, the balance stands 
as follows : — without the loan he catches in a year 3 X 365 = 
1095 fish ; with the loan he catches nothing in the first 
month, but 30 per day for the other eleven months, that is, 
335x30 = 10,050, or a surplus of 8955 fish. So long, 
then, as he has to give anything less than 8955 (next year's) 
fish for the borrowed 90 (present) fish, he gains by the 

In this illustration the difference in possible return between 
the two productive methods, and, with it, the upper limit of 
the economically possible agio, is absurdly high — 8955 next 
year's units for 90 present units is something like 10,000%. 
But there will always be a very important difference when the 
choice lies between capitalist production and hand-to-mouth 
production, as the latter is, of course, always extremely un- 
remunerative. The difference, again, will tend to grow less 
when the choice lies between two different capitalist methods ; 
and will become more rapidly less in proportion to the length 
of the process already secured without the loan. This fact is 
of very great importance as regards the rate of interest, not 
only in isolated, but also in competitive exchange. If we put 
it in the clearest possible way now, it will give a good basis 
for what comes later. 

In an earlier chapter I called attention to the well-attested 
fact that the lengthening of the capitalist process always leads 
to extra returns, but that, beyond a certain point, these extra 
returns are of decreasing amount. Take again the case of 
fishing. If what we might call the one month's production 
process of making of a boat and net leads to the return of the 
day's labour being increased from 3 to 30, — i.e. by 27 fish, — it 
is scarcely likely that the lengthening of the process to two or 
three months will double or treble the return. Certainly the 
lengthening it to 100 months will not increase the surplus by 
a hundredfold. The surplus return — for there will always be 
a surplus return — -will increase by a slower progression than 
the production period. We may, therefore, with approximate 
correctness represent the increasing productivity of extending 
production periods by the following typical scheme. 


Production Period. 

Return per annum. 






1 year 



2 years 



3 ., 



4 „ 



5 ,, 



6 „ 



7 „ 



8 „ 

68 : 



9 „ 




10 „ 



It must be understood that I do not attach any importance 
to these particular figures. Everybody knows that, in every 
branch of production and at every stage of technical know- 
ledge, the figures will differ. In one branch the fall of surplus 
return may be slower, in another it may be more rapid. All 
I lay stress on is the fact that the figures express the general 
tendency of surplus returns to fall. — Assume, to complete the 
hypothesis, that a worker needs £30 a year to maintain him 
in suitable circumstances, and let us try \f> find out on this 
basis the limit of the economically possible agio which a suitor 
for productive credit may, in the worst case, offer for a loan 
of £30 a year 

If the suitor has no capital whatever, he can get a return 
of only £15 without the loan: with the loan, in a one year's 
production period he can get a return of £35. In the most 
extreme case he may therefore, without altering his position 
for the worse by the transaction, offer an agio of £20 ; that is 
OOj-%. If, on the other hand, the suitor already has a 
capital of £30 (whence he gets it — whether it is his own or 
advanced from other quarters — does not affect the case), he 
can, without borrowing, engage in a one year's process and 
obtain a product of £35, and all that dejends on his getting 
the loan is the extension of the process from one year to two, 
and the raising of the return from £35 to £45 ; i.e. a yearly 
surplus of £10. 1 Here, then, the suitor can economically 

1 The total surplus return, due to the loan, figures out at £20, since, in each 
of the two years of the extended production period, the surplus return to labour 
is £10. But this surplus return is all the same divided over two years, so that 
only the amount of £10 is to be reckoned to one year. In more skilful disposition, 
however, the borrower need not take up, at the beginning of the production 


offer, at the most, an agio of £10 on £30 ; i.e. an interest rate 
of 33-^%. Similarly, if the suitor, by whatever means, is 
already equipped for a two years' process, the loan of £30 is 
now the cause of if surplus return of £S (£53 — £45) = 
26-1%. Thus the more ample the suitor's equipment is 
already — the more capital he has — the lower fall the surplus 
returns and the ratio of agio dependent on the loan. That is 
to say, the surplus falls to £5, £4, £3, £2, 30s., 20s., 10s., and 
the rate to 16f, 13^, 10, 6§, 5, 3j, If per cent. This fall is 
bound to emerge unless the returns obtainable in 1, 2, 3, 4, 
x production periods should run, not, as we have assumed, in 
the progression of 35, 45, 53, 58, 62, etc., but steadily in the 

much sharper progression of 35, 45, 55, 65, 75 105 

1005, etc. In this latter case, on every one-year extension of 
the production period made possible by the £30, there would 
depend a constant surplus return of £10, and the upper limit 
of the economically possible agio would remain uniform at 
33^-%. But a ratio of increase like this cannot in any case 
go beyond a few stages in some few productions ; x it cannot 
go on permanently and without limit in any production. 

We come, then, to the important proposition that to in- 
tending producers, generally speaking, a present loan has less 
value in proportion to the length of the production periods 
already provided for from other sources. The proposition 
directly applies to the rate of interest in isolated exchange, 
inasmuch as the valuation of the borrower for productive 

period, the whole amount of the loan from which he defrays his subsistence dur- 
ing that period : he may raise the - loan by successive instalments,- and this has for 
result that the loan is outstanding and requires to pay interest only for half the 
production period. If such a disposition is arranged the yearly surplus return 
may in the most extreme case be offered as a half-year's interest on the subsistence 
loan, and in this case the most extreme interest rate economically possible is 
double the figures given in the text. The raising of such subsistence loans by 
instalments thus exerts exactly the same influence on the relation between sub- 
sistence fund and surplus return, and, at the same time, on the height of the 
interest rate, as does a suitable "Staffelung" of production (see above, p. 325), with 
which phenomenon, as may be easily seen, it is closely and intimately connected. 
1 Up to a certain point the surplus return may now and then increase even 
in a greater ratio than the duration of the production period. It may, e.g., 
happen that the transition from rod -fishing to net -fishing shows a greater 
advance than the transition from primitive modes of fishing to rod-fishing. 
But beyond a certain point this cannot be maintained, and the surplus returns 
show a decreasing ratio. 


purposes directly gives the upper limit of the economically 
possible rate. It also allows us, however, to judge in what direc- 
tion this proposition must influence the rate of interest in 
competitive exchange, where the price is the resultant of the 
subjective valuations of individuals, of whom many are intending 

As has been said above, the case of productive credit is 
closely related to the case of the purchase of labour, the 
employment of productive labourers by the capitalists them- 
selves. Here, however, there enter certain complications 
which may be as easily and briefly stated under competitive 
exchange. I shall not, therefore, discuss them separately, but 
shall go on at once to explain the rate of interest in developed 
competitive exchange. 




The character of the market in which present goods are ex- 
changed against future goods has already been described. 1 We 
now know the people who appear in that market as buyers and 
sellers. We know that the supply of present goods is repre-